WHAT IS A YIELD SPREAD PREMIUM (YSP)?

Yield spread premium (YSP) is the fee paid by the wholesale mortgage lender to the loan broker in exchange for the broker bringing the loan to the lender. The YSP is paid as a percentage and is based off the interest rate obtained in the loan. In general, the higher the interest rate the loan broker gets the borrower to take than the higher the YSP.

Here are YSP and Commission examples:

YSP Example:

Interest rate = 6.00% with a YSP of zero (par rate)
Interest rate = 6.50% with a YSP of 1%
Interest rate = 6.75% with a YSP of 1.5%

You can see from this example that it is in the loan broker’s best interest to get the borrower the highest rate and in turn this gets the loan broker the highest YSP. The higher the interest rates than the higher the commission.

Commission Examples:

$100,000 loan
Interest rate = 6.00% with a YSP of zero (par rate). Commission = $0.00
Interest rate = 6.50% with a YSP of 1%. Commission = $1,000
Interest rate = 6.75% with a YSP of 1.5%. Commission = $1,500

$250,000 loan
Interest rate = 6.00% with a YSP of zero (par rate). Commission = $0.00
Interest rate = 6.50% with a YSP of 1%. Commission = $2,500
Interest rate = 6.75% with a YSP of 1.5%. Commission = $3,750

The borrower needs to take into consideration the following:

1) Wholesale rates.
The loan broker is most likely getting you wholesale mortgage rates that are lower than your traditional retail rates (if you walked into your local bank). The loan broker has shopped the loan (researched and contacted multiple wholesale lenders) looking for the lowest possible rate out there in the market. The loan broker than bumps up the rate a little to make his commission (YSP). You will need to do some research of your own to see if your rate is a great rate or not.

2) Origination fee (the loan fee)
You shouldn’t be charged a substantial amount on both the yield spread premium and the origination fee. It’s hard to say what’s too much and what’s too little because every loan is different, but keep an eye on the fees and ask why they’re being charged.

Do keep in mind that a broker may split up his or her fees by charging .50% on the yield spread premium and another .50% on the origination fee. This wouldn’t mean the broker is necessarily charging you twice. The fee is just being broken up, with some money coming out-of-pocket and some being bundled on top of the loan.

A loan broker making around 1% total fees (origination and YSP) on the loan is typical.

3) Loan broker motives.
Obviously, a loan broker will want to make money but a broker also has other motives. A reputable loan broker will want repeat business, referrals etc.

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