Yield Spread Premium
Yield spread premium is compensation a broker receives for selling a loan above market rate. Learn how YSPs affect mortgage costs.
Definition
Yield spread premium (YSP) is compensation paid by a lender to a mortgage broker for originating a loan with an interest rate higher than the lender’s par (market) rate. The broker may offer the borrower a no‑cost or lower‑cost loan with a higher rate, and the YSP covers closing costs. In the United States, regulations require brokers to disclose YSPs to borrowers and ensure that they act in the borrower’s best interest. While YSPs can reduce upfront costs, borrowers should evaluate the long‑term impact of higher interest rates on total loan expenses.
Why It Matters
A yield spread premium is money a lender pays a broker for placing you in a loan priced above the lender's par rate. It is what funds a no-closing-cost mortgage: you avoid cash at the table and pay for it through a higher rate for as long as you keep the loan. Post-2010 rules stopped brokers taking it from both sides, but the trade-off itself is still on offer under other names.
Examples
A borrower takes 6.75 percent instead of 6.375 percent with no closing costs, and the lender credit covering roughly $4,000 of fees is the yield spread premium.
On a $500,000 loan the quarter-point difference costs about $75 a month, so the $4,000 saved is repaid in about four and a half years.
A borrower who expects to move within three years takes the higher rate deliberately, because they will sell before the break-even.
Tips
Work out the break-even before accepting a lender credit: divide the costs covered by the extra monthly payment. Under your expected time in the house, take the credit.
Compare offers on rate and cash to close together. A quoted rate without its fee structure is not comparable to anything.
Look for lender credits on page 2 of the Loan Estimate. That is where this shows up now, and it is a legitimate option rather than something being hidden.
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