Yield Spread Premium
A payment made by a lender to a mortgage broker when the broker delivers a loan with an interest rate higher than the lender's minimum rate for that borrower. The premium compensates the broker for originating a loan that generates more profit for the lender through higher interest income.
Example
“The mortgage broker received a 2% yield spread premium from the lender because he convinced the borrower to accept a 6.5% rate instead of the available 5.5% rate.”
Memory Tip
Think 'You Sold Premium' - the broker gets paid extra for selling the borrower a higher rate than necessary.
Why It Matters
Understanding yield spread premiums helps borrowers recognize potential conflicts of interest, as brokers may have financial incentives to offer higher interest rates rather than the lowest available rate. Regulations now require disclosure of these payments to promote transparency in mortgage transactions.
Common Misconception
Many borrowers believe mortgage brokers always search for the lowest available rate, not realizing that yield spread premiums can create incentives to offer higher-rate loans that benefit the broker financially.
In Practice
A borrower qualifies for a 5.5% mortgage rate, but the broker offers 6% instead, earning a yield spread premium of 1% of the loan amount from the lender. The borrower pays more in interest over time while the broker receives additional compensation for delivering the higher-rate loan.
Etymology
Financial term from the 1990s mortgage industry, describing the 'premium' paid for the 'spread' between the borrower's rate and the lender's base rate.
Common Misspellings
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