Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Yield-Spread Premium

What it is:

Also known as negative points, yield-spread premiums are rebates lenders pay to mortgage brokers or borrowers. Yield-spread premiums are a percentage of the principal.

How it works (Example):

For example, let's assume that John wishes to borrow $100,000 towards buying a house. He receives a quote for a yield-spread premium loan with a 5% interest rate and -2.125 points, meaning that he will receive a $2,125 rebate that he can apply to the loan's closing costs.

The alternative and more traditional loan structure for the same amount might be a 4% loan and one point, meaning that the loan has a lower interest rate but requires the borrower to pay a $1,000 down payment for the loan.

It is important to remember that mortgage brokers don't always notify consumers about available yield-spread premium loans. A mortgage broker could, for example, receive a quote from a wholesale lender for a loan that has a 5% interest rate and -2.125 points. On a $100,000 loan, these yield-spread premiums translate to a $2,125 credit that can be applied toward closing costs. However, in order to earn money on the transaction, the mortgage broker marks up the loan to the consumer and quote a price of, say, 5% and 0 points, thereby retaining the $2,125 for themselves as compensation for brokering the loan.

Why it Matters:

Yield-spread premium loans usually have higher interest rates. Therefore, borrowers who plan to be in their houses for only a short time period are usually the best candidates for these loans. The extra interest over a relatively short period of time tends total less than the closing costs the borrower would have had to pay otherwise.

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