Just because you live in Eustis, Mount Dora, or Tavares, you are not immune to this mortgage financing fee that mortgage brokers and correspondent lenders almost always charge.
Yield Spread Premium (often referred to as YSP) is quite simply the opposite of buying down an interest rate. For example, if you want to buy down your interest, you can pay the bank/lender a point (1% of the loan amount) or more. Each point you pay is not a direct reduction of your rate by a percent. It is often 1 point buy down equals .25% reduction in interest rate. This differs from lender to lender. With YSP, you can increase your interest rate in exchange for the bank paying you points.
Why is this good? Lenders originally created the concept of YSP for borrowers that want to finance closing costs into their loan by taking the higher interest rate. Let’s say you have a mortgage for $100,000. Your closing costs are about $4000 (this includes pre-pays, lender fees, title fees, government fee, etc). You only have $3000 towards your closing costs. Your par rate (no buy down or YSP) is 6.0%. To come up with the extra $1000 needed to close, you can request a higher interest in exchange for the YSP to be credited to your closing costs. To obtain the 1% YSP (or $1000), the lender may increase your rate to 6.5%. So it will cost you .5% in interest to raise 1% of the loan amount in cash.
Why is this bad? Lenders have gone from mentality of helping borrowers with YSP to rewarding brokers and correspondent lenders with YSP for charging a higher interest rate. Until recently, this fee was never disclosed until the day of closing on the HUD-1 Settlement of Costs. Borrowers would see this fee, but were calmed over with the simple explanation of “Do not worry about this fee. The lender pays this fee, not you as the borrower.” Well, as I just got done explaining the way this fee works, the borrower does pay this fee. They pay it each month with the higher mortgage payment resulting from the higher interest rate.
A broker or correspondent lender can make extra money off of a borrower without them ever having knowledge of it through YSP, unless the are paying close attention to certain documents that are now being required be disclosed. Even though they are disclosed, if you do not know what you are looking at or where to look, you may agree to paying this fee.
So where do you look? The first place to look is on the Good Faith Estimate (GFE). There is a place clearly defined on all GFE where Yield Spread Premium is listed. This is labeled as a fee paid outside of closing and again is explained as the lender pays this fee not the borrower. Not true. Then, you can look at the broker fee agreement. It has to be listed here as it is a fee being paid to the broker or correspondent lender. Finally and the more difficult way of finding this fee is the the Truth In Lending (TIL). I will cover how to read a TIL in a future blog. But for a quick explanation of how to tell if you are paying too much for your loan, the higher the APR is from your actual interest rate, the more you are paying for you loan.
Now, you may have figured something out while reading this post, do not worry if you haven’t because I am going to cover it right now. NO CLOSING COSTS Loans… that is right. There are closing costs. You are just paying them through the YSP created by the higher rate. Next time you see a NO CLOSING COSTS Loan, look at their interest rate and compare it to a loan that is charging closing costs. You will see that the interest rate is higher. Nothing is ever truly free.
When should you use YSP over paying closing costs up front? General rule is if you are planning on refinancing or selling within 3 years. Let’s say the broker fee is 2% (or $2000 on a $100,000 loan amount). Now you can pay the $2000 up front (or on a refinance wrap it into the new mortgage) or take a higher rate. Let’s say that higher rate is .75% higher. That equals to $750 more in interest per year in mortgage payments. That is $750 more in possible tax deductions. Over 3 years, that equals $2250. Yes, it is $250 more than the original amount, but you got the extra deductions to offset that extra amount. Beyond 3 years, pay up front.
If your broker or correspondent lender does not disclose the YSP or give you an option using YSP in lieu of paying the fees upfront, then beware. You have now been educated on this hidden fee and its features. With knowledge comes power. With power, you can now protect yourself and make sure that you get the best deal for yourself.
And one last word of advice, once your rate is locked, ask for a copy of the rate lock. This will show exactly how much YSP is being made. If the broker or correspondent lender was claiming to now charge a YSP, this will prove or disprove it. And YSP is required by law to be disclosed immediately after the final amount is determined, but no less than 3 days prior to closing. Remember, you still have the option of not signing the mortgage even if you find out at time of closing.
If you have any questions or have a Good Faith Estimate that you want reviewed, please call 352-308-7219 or fax the GFE to 888-807-4123.
Comments
[...] Yield Spread Premium – The Hidden Fee [...]
[...] Good Faith Estimate (GFE): This is an estimate of the closing costs that you will be charged for your mortgage. A properly completed GFE should include lender fees, title fees, government fees, third party fees, and the mortgage broker fee. Also, recently required on the GFE is Yield Spread Premium. [...]
[...] something. If all other factors are equal, the loan with the lowest fees would be best. (The “No-Cost” mortgages you hear about are a crock. No, you aren’t paying anything up front, but to [...]
[...] I do need to throw out this word of advice on mortgage brokers… “BEWARE OF THE HIDDEN FEE.” Some brokers will mark up the interest rate to get paid what is known as Yield Spread Premium (YSP). Thanks to recent legislation, brokers are now required to disclose this fee prior to closing. But there is a problem with this: the broker has to disclose the fee within 3 days of knowing the YSP but no less than 3 days prior to closing. The broker knows the final YSP only after the rate has been locked. What this means is that you may not have gotten the best rate at the time of rate lock. To read more about this topic, click here. [...]
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