How To Read A Wholesale Lender Rate Sheet and Beat Mortgage Banks & Brokers At Their Own Game!

Understanding Yield Spread Premium and Service Release Premium Overcharging

In the mortgage industry, both brokers and banks may engage in practices that result in consumers paying more than necessary. One such practice is known as Yield Spread Premium (YSP) for loans originated by brokers and Service Release Premium (SRP) for loans originated by banks. This article provides insight into how these practices work and how you can protect yourself from being overcharged.

What is Yield Spread Premium and Service Release Premium?

• Yield Spread Premium (YSP): This is an additional fee paid to mortgage brokers by lenders for originating a loan at a higher interest rate than the par rate (the rate at which the lender does not pay or charge points). Essentially, it’s a hidden profit for brokers when they place you into a loan with a higher interest rate than necessary.

• Service Release Premium (SRP): This is similar to YSP but applies to loans originated by mortgage banks. It’s a premium paid to banks for selling the servicing rights of the loan to another lender or investor. Like YSP, it benefits the bank at the expense of the consumer.

The Impact on Home Buyers

Professor Howell E. Jackson from Harvard Law School testified before the Senate Banking Committee, revealing that a significant majority of borrowers, approximately 85-90%, pay YSPs. The average amount of YSP is about $1,850 per transaction. This premium constitutes a major revenue source for mortgage brokers and is not an optional form of financing but rather a widespread practice.

The government's understated figures suggest that YSP and SRP overcharging costs American homeowners around $16 billion annually.

How to Protect Yourself

1. Compare Offers:

   • Always obtain and compare mortgage offers from multiple lenders. Differences in rates and fees can be substantial. Be cautious of rates that seem unusually low, as they may come with hidden costs.

2. Understand Fees:

   • Look closely at the fees associated with your mortgage. Use the Annual Percentage Rate (APR) to compare offers, as it includes both the interest rate and any fees. Challenge fees that seem excessive.

3. Evaluate Rate Sheets:

   • Learn how to read and interpret mortgage rate sheets. The rate sheet will show different interest rates and associated costs. For example, a rate of 6.000% on a rate sheet might come with a discount cost, while a rate of 6.500% might include a yield spread premium, increasing the total cost of the loan.

4. Shorten Your Term:

   • If feasible, opt for a shorter mortgage term. This will typically increase your monthly payment but will reduce your total interest payments over the life of the loan.

5. Pay Bi-Weekly:

   • Switching to bi-weekly payments can reduce the total interest paid, as you make an extra monthly payment each year.

6. Cut PMI:

   • If you have private mortgage insurance (PMI), request its cancellation once your mortgage balance falls below 80% of your home's value.

Example Scenario

Using a rate sheet from Ampro Mortgage as an example:

• 30-Year Fixed Rates:

  • Rate of 6.000%: Costs a discount of -0.164%.

  • Rate of 6.500%: Includes a YSP of 1.498%.

For a $200,000 loan:

• At 6.000%: $200,000 x 1.164% = $2,328.00 (No YSP)

• At 6.500%: $200,000 x 2.498% = $4,996.00 (Includes YSP)

The difference illustrates how banks and brokers may double their income by charging YSP, increasing the total cost to you, the borrower.

Conclusion

Understanding how mortgage pricing works and being aware of practices like Yield Spread Premium and Service Release Premium can help you avoid hidden costs and save significant amounts over the life of your loan. By comparing offers, scrutinizing fees, and learning to read rate sheets, you can protect yourself from being overcharged and make more informed decisions about your mortgage.

For a comprehensive guide on avoiding these pitfalls, consider exploring resources such as the ebook "Mortgage Secrets Exposed!" for additional strategies and insights.

Good luck in your mortgage journey!