YSP is an acronym for Yield Spread Premium. This is the rebate that a lender will pay to a mortgage broker in exchange for selling the interest rate above the wholesale par rate.
This is probably best understood by using an example. If the loan amount is $100,000 and the wholesale par rate is 5%, if the loan is sold or the interest rate is sold at a 5.25%, there is a 1 point rebate to paid by the lender to the mortgage broker. 1 point in this case is 1% of the loan amount or $1,000.
There is some controversy related to YSP because there is incentive for brokers based on this rebate to increase the interest rate more than what it “should” be. Consumers are typically not aware of this YSP as it is paid on closing. Basically this means the borrower is paying a higher interest rate than what may otherwise be available to them.
Many mortgage brokers will offer a “no closing cost” loan product and use the funds from the YSP to cover closing costs. When applying for a loan with a mortgage broker, you should as a borrower ask the broker how much the YSP is and use that as a negotiating tool to lower the cost of your interest rate or possibly the origination fees or get some of the closing costs covered.
There are a lot of lenders out there, so you do have the option to be picky. Work with a lender you can trust and ask for references where necessary.
Reproduced with permission from Brian G. Armstrong. To read more articles by Urban Sotensek , click here Copyright 2008 Brian G. Armstrong. All rights reserved worldwide.