MORTGAGES: When acquiring a mortgage, look for “YSP” on your documents. Look for it on page 2 of the HUD1 Settlement Statement. YSP stands for Yield Spread Premium. This is one way mortgage brokers make their money outside of fees. It will be based on points, where 1 point equals 1%. With “0” YSP, you will get a lower rate. It may a be better option to pay the broker a set fee upfront rather than giving the broker points on the back of your loan, where it ends up making your loan a higher rate.
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Most brokers are looking to make approximately 2 points on a loan (front end and/or backend, combined). If you are doing a $700k loan (1st lien position), that is nearly $14,000 in mortgage origination fees — 2 points (2% of loan amount).
A larger loan like that often results in upfront mortgage fees that are just unacceptable to most buyers. Therefore, it is more common to pay 1 point up front ($7k “out-of-pocket” in this example) and let the mortgage broker get the other 1% or so via YSP direct from the lender.
Getting a loan at 0% YSP is known as “at par” and does yield a better interest rate. Keep in mind, though, that you can actually get lower than 0 and keep buying down the rate (sometimes as much as -2). That means paying 3 points or more “out of pocket.”
It is a balancing act for the mortgage broker, as he or she needs to help the borrower(s) determine the best scenario for their specific needs, taking into account the amount of liquid assets they have on hand — as well as how much needs to be available to cover downpayment amounts.