Yield Spread Premium (YSP)

Lending & Loans, Real Estate and Mortgage Loans

What Is Yield Spread Premium (YSP) and How Does It Work in Mortgages?

Yield Spread Premium (YSP) is a payment made by mortgage lenders to brokers when borrowers accept interest rates higher than the lender’s par rate. This payment often appears as lender credits to offset closing costs but increases the borrower’s total interest paid over the life of the loan.

When obtaining a mortgage, borrowers may encounter options involving slightly different interest rates and associated closing costs. Yield Spread Premium (YSP) historically referred to the payment a mortgage lender makes to a broker when the borrower agrees to an interest rate above the “par rate”—the lowest rate at which the lender neither pays nor receives additional premiums. This premium compensates brokers for delivering more profitable loans to lenders.

YSP frequently appears as lender credits on loan documents, reducing out-of-pocket closing costs. However, choosing a higher interest rate with lender credits means borrowers pay more in interest over the loan term. For example, accepting a 4.25% interest rate with lender credits might save thousands upfront but increase monthly payments and total interest compared to a 4.0% rate without credits.

Due to concerns about transparency and borrower costs, regulations such as the Real Estate Settlement Procedures Act (RESPA) and the Dodd-Frank Act led to the replacement of the term YSP with “lender credits” on modern disclosures like the Loan Estimate and Closing Disclosure. These clearer disclosures, mandated by the Consumer Financial Protection Bureau (CFPB), help borrowers understand the trade-off between upfront savings and long-term costs.

Borrowers should carefully compare Loan Estimates from multiple lenders, focusing on both interest rates and lender credits, to determine the best option. While using lender credits is helpful if cash for closing costs is limited, paying closing costs upfront to secure a lower interest rate usually saves more money long term.

For more details on mortgage-related costs and disclosures, see our articles on Mortgage Closing Costs and Loan Estimate. Additionally, understanding the Mortgage Origination Fee and Closing Disclosure can help you navigate loan documents effectively.

References:

Consumer Financial Protection Bureau (CFPB): What are lender credits? https://www.consumerfinance.gov/ask-cfpb/what-are-lender-credits-en-1738/
Investopedia: Yield Spread Premium (YSP) https://www.investopedia.com/terms/y/yieldspreadpremium.asp

Lending & Loans, Real Estate and Mortgage Loans

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