Yield Spread Premium

Sometimes (always?) homebuying is tough. A yield spread premium can make it easier to snag that mortgage, but can also make it more expensive.

In a nutshell, a yield spread premium is money paid to mortgage brokers and borrowers in exchange for a higher interest rate on the mortgage. The yield spread premium is also known as “negative points”...and “points” in mortgage-speak are always a percentage of the principal (how much money you’re borrowing).

Let’s look at the yield spread premium in action. On an old-school mortgage, someone might qualify for a 3.5% mortgage and have to pay $3,000 up front to cover closing costs (which are a bunch of little things, but all necessary for getting a mortgage). If he didn’t quite qualify for that great of an interest rate, he could possibly get a quote for a yield spread premium, which would be a higher mortgage rate...say, 4.5%...and the $3,000 would be paid up front, which covers closing costs.

It might sound like a sweet deal, but truth be told, it’s only sweet in the short-run. Most mortgages are around 30 years, and paying 4.5% on a mortgage for 30 years really adds up when you could be paying 3.5% instead. If you’re only going to have the house for a short time though, this could be a better option than the lower interest rate loan.