Par Rates And Mortgage Brokers
The par rate is the standard interest rate offered by a mortgage lender based on the terms of the loan and the creditworthiness of the borrower. This rate is free of any adjustments such as closing points, discount points, fees, or commissions.
When a homebuyer decides to work with an independent mortgage broker, the broker will be able to compare loans from a variety of banks and mortgage companies. For their work, the broker will be paid a commission. Instead of receiving a cash commission, many brokers instead receive compensation in the form of the yield spread premium, which is an adjustment upward in the par rate. All adjustments made to the par rate must be disclosed in the loan agreement and agreed to at closing in the settlement statements .
How Do Ysps Work
There are two ways that mortgage brokers are typically paid by the borrower. The first is through an origination fee that comes due at closing. However, if your upfront paperwork doesnt include an origination fee, your broker is likely being paid through a yield spread premium, which means youll be paying a higher interest rate than you otherwise would for your loan.
If youve heard of a no-cost loan, the YSP is likely how they can make that sweet offer.
Seem like a bad deal? Not always, and well find out why later.
Services Of Mortgage Brokers Versus Mortgage Lenders
Most mortgage bankers will only offer government and conventional loans. Some mortgage bankers may have correspondent lending relationships with larger mortgage bankers on Jumbo loans and other non-conforming loan programs. However, mortgage brokers can have dozens of lending relationships with wholesale lenders.
Mortgage Brokers may have outlets to specialty lenders who specialize in the following types of loans:
- Bank statement mortgages
- Asset-depletion mortgages
- P and L no doc stated income self-employed mortgage loans with no income tax required and only one year of self-employment
In lieu of their services, mortgage brokers get paid a commission often referred to as a yield spread premium:
- The commission the lender pays the mortgage broker is called yield spread premiums, also known as YSP
- The law requires yield spread premiums of mortgage brokers need to be disclosed
- Mortgage bankers are exempt from disclosing their back end compensation
The yield spread premiums are basically the mortgage brokers compensation by the wholesale mortgage lender.
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Yield Spread Premium Charged By Mortgage Brokers
Mortgage brokers are paid a commission, referred to as Yield Spread Premium Explained, from wholesale mortgage lenders or end lenders, for their services of originating a mortgage loan. Mortgage brokers are licensed mortgage loan originators who have relationships with multiple wholesale mortgage lenders. Mortgage Brokers are licensed professionals who have access to multiple wholesale lending partners. Mortgage brokers enter into lending partnerships with wholesale lenders. They can help mortgage loan applicants who have special needs. For example, if a bank cannot help borrowers get a mortgage due to their lender overlays, a mortgage broker can possibly help. This is because mortgage brokers have outlets to specialty wholesale lenders.
In this article
Maximum Mortgage Broker Commission
The maximum amount a mortgage broker can charge a borrower is no more than 2.75%. This includes fees and costs along with the yield spread premiums. Most mortgage brokers cap their yield spread premiums at 2.5%. This way they have 0.50% to work with in the event if there are other costs and fees such as underwriting fees, processing fees, or credit report fees.
For example, here is a case scenario:
- Borrowers get a $100,000 mortgage
- On the fees worksheet and Loan Estimate, it states the yield spread premiums at 2.5% or $2,500
- That cost is the commission that the mortgage broker makes
Normally, the yield spread premiums are split between the owner of the mortgage brokerage and the mortgage loan originator. Whether you are a mortgage broker or mortgage banker, the higher the compensation on the back end, the higher the mortgage rates. The lower the compensation on the back end, the lower the mortgage rates to the consumer. In general, mortgage bankers have much higher rates than mortgage brokers. This is because the compensation of most mortgage bankers is significantly higher than the 2.75% mortgage brokers can make. The mortgage broker can lower the yield spread premium to get borrowers lower mortgage rates.
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Buying Or Refinancing A Home Watch Out That The Loan Isn’t More Expensive Than It Looks
NEW YORK — The yield spread premium is a mystery to most home buyers, but it would pay them to get more familiar with this little understood feature of the mortgage business.
It’s the basis for the fee a broker gets for selling a loan above the par rate, or the lowest interest rate a borrower qualifies for. It’s a standard industry practice, but it can also be an incentive for abuse.
Say a couple buys a new house and a broker finds them the lowest wholesale rate available of 6.5 percent for a 30-year fixed mortgage. The broker needs to make money on the deal, so he offers them a loan at say, 6.75 percent. The lender then pays the mortgage broker a percentage of the total loan based on the quarter point yield spread premium.
Even though they paid an extra quarter point, the couple probably got a better deal than they could have found on their own. Brokers can also guide consumers through the maze of confusing paperwork, including filling out loan applications.
That’s why, according to David Berenbaum, spokesman for the National Community Reinvestment Coalition , brokers originate up to 70 percent of all mortgages.
But the larger the yield spread, the more a broker earns, and that can tempt them to steer borrowers to higher interest loans.
After coming up with a down payment, it can be difficult for first-time home buyers to cover closing costs that can hit five figures: the title search and insurance, legal fees, processing costs, etc.
Yield Spread Premium For Dummies
Many homeowners have never heard of Yield Spread Premium and do not understand why their mortgage rate is marked up. Yield Spread Premium sounds complicated however, once you understand why its there, you can avoid paying this unnecessary markup. Cutting the fat from your mortgage rate by as little as a quarter point can lower your monthly payment by hundreds of dollars in many cases. Here are the basics you need to understand about Yield Spread Premium and mortgage interest rates.
Why Yield Spread Premium?
From the lenders point of view this markup is all about return on investment. Wholesale lenders make the majority of their profits selling mortgage loans to investors on the secondary market. Mortgages with above market interest rates bring these lenders premium profits this is why lenders incentivize overcharging homeowners with retail mortgage rates.
Theres a lot that goes on behind the scenes when your mortgage broker quotes you an interest rate. Once your broker understands your financial situation theyre sizing you up much like a used car salesman does when you walk onto the lot. Your mortgage broker knows the wholesale mortgage rate you qualify from the wholesale lender however, the broker wants to up sell you on a higher mortgage rate because of this incentive from the wholesale lender. Heres an example to illustrate how Yield Spread Premium works.
Yield Spread Premium is Dishonest
How to Find an Honest Mortgage Broker
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What Is Yield Spread In Real Estate
The difference between the par rate and the actual rate that you get is called a yield spread. The yield spread premium serves as a premium provided by a wholesale mortgage lender to the broker or loan officer as an incentive to sell you a loan that has a higher interest rate than the par rate for which you qualify.
How To Calculate Yield Maintenance
The formula for calculating a yield maintenance premium is:
Yield Maintenance = Present Value of Remaining Payments on the Mortgage x
The Present Value factor in the formula can be calculated as -n/12)/r
where r = Treasury yield
n = number of months
For example, assume a borrower has a $60,000 balance remaining on a loan with 5% interest. The remaining term of the loan is exactly five years or 60 months. If the borrower decides to pay off the loan when the yield on 5-year Treasury notes drops to 3%, The yield maintenance can be calculated in this way.
Step 1: PV = x $60,000
PV = 4.58 x $60,000
Step 2: Yield Maintenance = $274,782.43 x
Yield Maintenance = $274,782.43 x
Yield Maintenance = $5,495.65
The borrower will have to pay an additional $5,495.65 to prepay his debt.
If Treasury yields go up from where they were when a loan was taken out, the lender can make a profit by accepting the early loan repayment amount and lending the money out at a higher rate or investing the money in higher-paying treasury bonds. In this case, there is no yield loss to the lender, but it will still charge a prepayment penalty on the principal balance.
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When A Loan Is Characterized As Conforming It Means The Loan
A conforming loan is a mortgage with terms and conditions that meet the funding criteria of Fannie Mae and Freddie Mac. Conforming loans cannot exceed a certain dollar limit, which changes from year to year. In 2021, the limit is $548,250 for most parts of the U.S. but is higher in some more expensive areas.
Who Should Use Yield Spread Premium
Yield spread premium is most commonly used when refinancing a home loan, but it can also be used to obtain a new home loan. Borrowers who are refinancing their home loans should shop around for lenders who are willing to offer them a competitive interest rate without charging a yield spread premium. Borrowers who are taking out a new home loan may also be able to negotiate a lower interest rate by paying a yield spread premium. In either case, it is important to compare the total costs of the loan, including any fees, before making a decision.
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The Service Comparisons Between Mortgage Brokers Versus Mortgage Bankers
Mortgage bankers normally only offer loans they offer such as government and conventional loans. Mortgage brokers can offer government and conventional loans like mortgage bankers but can also offer non-QM loans and other alternative financing loan programs. Mortgage brokers and mortgage bankers get paid a commission for their services. The commission they make is called yield spread premiums which are another word for commissions. Loan officers at both mortgage lenders and mortgage brokers get paid commissions for originating loans.
Yield Spread Premium Over
And almost every lie you ever get told in this industry stems from banks and mortgage brokers seeking to maximize this profit center in your loan.
Im not going to sugar-coat this
Understanding Yield Spread Premium is a little difficult. So dont feel bad if it doesnt sink in right away. Keep at it until it does.
Read the all yield spread premium articles in the Yield Spread Premium category, do a Google searchanything and everything until the light bulb shines above your head.
Re-read all the yield spread premium articles on our site until you get it.
Use the Comments Section to ask questionsIll answer them all.
The savings for understanding yield spread premium could buy you another house or put a kid through college.
So, its worth it!
Lets just start with a tutorial and answer the basic question:
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Is Yield Spread Premium Illegal Or Will It Become Illegal
Great question!
What the average consumer doesnt know is just how wide-spread of an activity and how profitable the practice of rate bumping to insure YSP or SRP income really is.
If Joe Sixpack actually knew these things one might have a shot at pressuring State legislatures or even Congress to pass laws making it illegal.
But sadly thats not the case. The reality is, once again, the powerful banking interests get laws passed favoring more income for them on the backs of those they supposedly servetheir customers.
Those interests will powerful lobbyists are the same folks who get laws passedand that is not you or me.
Charging Yield Spread Premium or getting income from mortgage rate bumping is not now nor has it been illegaland it wont be anytime soon.
The most recent changes proposed in new legislation has stopped just short of outlawing it.
Im afraid the mortgage broker lobbyists as well are just too powerful to let it go.
Legislators have a fairness issue to deal with if they outlaw Yield Spread Premium for mortgage brokers, but continue to allow Service Release Premiums mortgage banks and direct lenders. Since banks are not about to give up service release income, YSP will remain legal by proxy.
I think both are here to stay.
Thanks for the question!
Careful You Arent Charged Twice
- A mortgage broker or loan officer
- Could effectively charge a borrower twice
- Once on the back-end and once on the front-end of the loan
- And make a ton of money per loan
You shouldnt be charged a substantial amount on both the yield spread premium and the loan origination fee. Its hard to say whats too much and whats too little because every loan is different, but keep an eye on the fees and ask why theyre being charged.
Also keep in mind that a broker may split up his or her fees by charging a half percent in the yield spread premium and another half percent in loan origination fee.
This wouldnt mean the broker is necessarily charging you twice. Their commission is simply being broken up, with some money coming out-of-pocket and some coming in the form of a higher mortgage rate.
If youre buying down your rate, there should not be any yield spread premium, since youll actually be paying discount points to lower the rate on the back-end. Of course, this means youll need to pay a commission as well, so it can get pretty expensive if you go after that low, low rate.
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Will They Be Considered A Part Of The Total Points And Fees Payable At Closing
On December 2, 2004, the California Court of Appeal, Fourth Appellate District evaluated whether a yield spread premium should be included as part of the total points and fees during closing under the definition in Financial Code Sections 4970.
Plaintiff Wolski had borrowed $185,000 from Fremont Investment & Loan. Wolski alleged that it was a covered loan under Section 4970 for the following reasons:
1) His loan amount was below $250,000 and2) His points and fees at closing were over six percent.
Wolski had included $3,700 YSP into his calculations, causing the total figure to be 6.47% of the total loan. Without the YSP, the loan would not have been a covered loan since his closing costs totaled $8,274, only 4.5% of the total loan.* Fremont Investment & Loan brought a successful demurrer and Wolski appealed. The Fourth Appellate District affirmed and issued an opinion published as Wolski v. Fremont Inv. & Loan, 22 Cal.Rptr.3d 582, 2004 Daily Journal D.A.R. 15,056 .
As Wolskis lender pointed out, Wolski had to overcome to major hurdles in interpreting the statute. First, the costs had to be paid by the borrower. Second, the costs had to be at or before closing. A YSP is neither, and Wolski failed to convince the Court otherwise.
The Fourth Appellate District also went on to find that nothing in the Legislative history for the code section indicated an intent that closing costs should include charges that would payable over the life of the loan.
The Importance Of The Yield Spread Premium
Yield spread premium is a term that many homeowners do not know about because it is a fee that many mortgage that brokers do not share with borrowers. Knowing what this means, and how it effects your wallet, will help you negotiate the best terms for your loan.
What is Yield Spread Premium?
Yield spread premium refers to the difference in fees paid to a broker for rates. For example, a 5.50% rate may offer a broker a payment of 1% of the loan amount for their services. A 6.00% rate, on the other hand, may offer 2% of the loan amount for broker services. The bank pays the broker directly, so you are never involved in payments.
YSP vs. Points
Discount points is the percentage you pay to lower your rate. YSP, or yield spread premium, is paid by the lender. Both fees are paid to the broker, but they are paid for very different reasons.
In order to properly determine the amount that you are charged, review your documents closely because all brokers are required to disclose all fees within three business days of your loan application.
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Why Homeowners Should Be Cautious
Getting a loan with a yield spread premium allows you to reduce or eliminate a portion of your closing costs. But youll have to consider the long-term implications of taking that route. By taking on a higher interest rate to lower your out-of-pocket costs, youll likely pay more money over the life of your mortgage loan .
Try out our refinance calculator.
Homebuyers also have to watch out for mortgage brokers who attempt to double dip. In 2010, the Federal Reserve issued new rules regarding yield spread premiums in an attempt to prevent brokers from taking advantage of buyers. The rules state that brokers cant charge an origination fee after the lender has already raised the interest rate and paid a yield spread premium for the same loan. But youll need to read over your closing documents carefully to make sure youre being charged the appropriate amount.
