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Yield Spread Premium
Compensation paid by a lender to a broker for delivering a loan at a higher interest rate than the par rate.
Definition
A Yield Spread Premium (YSP) is the payment a lender makes to a mortgage broker when the broker locks a loan at an interest rate above the lender's par rate. For example, if the par rate is 7.0% and the broker locks at 7.5%, the lender pays the broker a premium, which can be used to offset the borrower's closing costs. This is essentially the inverse of discount points — instead of the borrower paying to lower the rate, the borrower accepts a higher rate in exchange for reduced upfront costs. YSP can benefit borrowers who prefer to minimize cash at closing, but it increases the total interest paid over the loan term.
How This Relates to DSCR Loans
In DSCR lending, brokers commonly use lender-paid compensation (similar to YSP) to cover closing costs. Understanding this trade-off helps you choose between lower rate vs. lower closing costs.
Related Terms
Points (Discount Points)
Upfront fees paid to the lender to reduce the interest rate, where one point equals 1% of the loan amount.
Interest Rate
The percentage charged by a lender for borrowing money, applied to the outstanding loan balance.
Origination Fee
A fee charged by a lender or broker for processing and underwriting a new loan.
APR (Annual Percentage Rate)
The annualized cost of a loan including interest and fees, expressed as a percentage.
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