Colorado mortgage loans: What is a yield spread?
There is a little known addition that many unethical loan originators add to mortgage rates that can end up costing the homeowner many thousands of dollars. This little gimmick is called a “yield spread premium” and knowing how it works can save the homeowner from spending a great deal of money unnecessarily on their newly obtained mortgage. Understanding the mortgage yield spread premium and how to avoid getting suckered into accepting one can help homeowners reduce the additional $16 billion paid by homeowners annually for yield spread premiums.
What Is Yield Spread?
The way that the yield spread premium works is actually quite clever. Many homeowners believe that the interest rate that they pay for their mortgage is solely based on their credit history and credit score. What the homeowner does not realize is that the interest rate that is determined by the credit score is very rarely the interest rate that the homeowner will end up paying for the mortgage.
Why Would I Pay Yield Spread?
Mortgage brokers obtain a bonus for convincing the homeowner to accept a higher interest rate than the one calculated based on the homeowner’s credit score. For every 0.25% the mortgage broker can convince you to pay above and beyond the calculated interest rate, the broker typically earns an additional 1% commission based on the total amount of the mortgage.
Paying the yield spread premium on top of the interest rate already approved by the lender, and in addition to the fees that the homeowner must pay to the mortgage broker, can end up costing the homeowner a great deal of money. Because the mortgage broker receives a commission for allowing the homeowner to overpay for their mortgage, they are not going to let the homeowner know that they are paying a higher percentage rate than that for which they had qualified.
By locking in a interest rate that is higher than the current market interest rate, the mortgage broker is guaranteeing that the homeowner will pay the lender thousands of dollars in additional interest over the life of the loan. This is great for the broker and the lender, who both make money on the deal, but is bad for the homeowner who could probably put those additional dollars to better use.
Avoid Paying Yield Spread
Homeowners that know about this tactic can avoid paying a costly yield spread premium on their mortgage by following a few simple tips. One of the easiest ways to avoid paying a yield spread premium is to let the mortgage broker know that you know about it.
Brokers operate under the assumption that the homeowner is unaware that they are paying a higher interest rate for their mortgage than they were approved for. By asking the broker whether the interest rate they are showing you contains a yield spread premium or asking whether the rate reflects the current market rate, the homeowner is making the broker aware that they know about the tactic and will not be taken advantage of.
Another route to uncovering whether a yield spread premium has been added to the mortgage quote is to ask to see the original interest rate guarantee provided by the lender. If the interest rates on the quote and the guarantee are different, you have the ability to tell the broker that you agree to the rate provided by the lender and not the rate with the yield spread premium added in. Knowing what a yield spread premium is and how to avoid it can save the homeowner a great deal of money over the life of their mortgage.
When shopping for Westminster CO real estate, or for real estate anywhere in the general Denver metro area, be sure to use an ethical mortgage lender who is recommended by your Realtor, or a trusted friend. This effort alone will save you the trouble of worrying about whether your loan originator is manipulating your loan so as to benefit themselves.