We’ve explained yield spread premiums and mortgage points several times and want to illustrate the point in a manner that should be quite evident.  Let’s look at a GOOD mortgage versus a BAD mortgage - first time home buyers should pay close attention here.

To keep this simple, we will break this down into 2 simple mortgage scenarios and then analyze the details:

1.) 30 year fixed rate mortgage at 6.00%, $250,000 loan amount, no points.

• Principal and Interest payment: $1498.88/mo.
• Total Interest Paid after 30 yrs: $289,593.14

2.) 30 year fixed rate mortgage at 6.5%, $250,000 loan amount, no points.

• Principal and Interest payment: $1580.18/mo.
• Total Interest Paid after 30 yrs: $318,861.58

Now let’s look at the basic differences between example 1 and 2.  You would pay $29,268.44 more in interest payments with loan option 2.  You would pay $81.30 more per month with option 2.  So who ends up with option #2?   Who gets “screwed?”

Assuming that you have are approved for a mortgage with the terms of option 1, you are technically approved for the “not-so-hot” mortgage option 2.  How can this be?  It all has to do with yield spread premium, your mortgage company’s desire to make more money off of you, and your knowledge of how mortgages are priced.  Without completely re-visiting what yield spread premium is, here’s the short explanation:

The higher the rate a mortgage broker offers you, the more rebate they receive from the wholesale lender that actually funds your loan.  So if the Yield Spread Premium (YSP) a broker will receive by offering you 6.5% is 2.5 points (2.5% of the loan amount), you get the higher rate with the higher payment, and nearly $30,000 more in interest paid over the life of the loan.  Compare that to the 6% option where they might have made a fair 1% of the loan amount, and you can see where greed might kick in and the broker wants to make an extra 1.5% in YSP by offering the higher rate.  After all, 1.5% extra commission is an extra $3750.00 based on our $250,000 loan amount example!  That’s a (3) 50″ plasma TVs…10% down on a luxury car, maybe a couple mac books.   While the loan officer enjoys those items, you pay over $80 more per month in your payment - just over $960 more per year.  Yay!

The moral of the story is to work with a professional mortgage broker that is upfront about fees including commissions received like YSP, is fair with fees charged, and has the highest levels of integrity and honesty.  Always do your research!  We provide as much information as possible to make sure all homeowners get the mortgage they deserve.

 

 

Tags: good vs bad mortgage, ysp