Best Mortgage Rates: YSP Doesn't Mean "You're Swindling People"

Dear Liz,

I'm working with a mortgage broker to get a mortgage and I heard that brokers have things called yield spread premiums that keep me from getting the best mortgage rate. That sounds like some kind of rip-off! What is a yield spread premium anyway, and am I being ripped off?

Doug in Denver

Dear Doug,

The presence of a yield spread premium (YSP) doesn't mean that your broker is ripping you off. Originating a mortgage takes time and money, and brokers can be compensated either by you or the lender they deliver your loan to. If you want the best interest rate possible, you pay all the loan fees plus one or more discount points to get that rate. However, 85% of those who refinance choose to have the lender pay the fees instead--and this is done with a YSP. In order for the lender to be able to pay your costs, it charges you a slightly higher rate. So, your decision to pay to get the best mortgage rate possible depends on whether you prefer to pay more now to save money over the life of the loan, or if you'd rather save money now and perhaps pay more over the life of the loan. You can see what effect paying fees or using a YSP has on your APR by running different scenarios through a mortgage calculator. But when the APR of two options is similar, it's better to choose the one with fewer upfront costs, in case you don't keep the loan long enough for the monthly savings to recoup the out-of-pocket charges.