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Yield Spread: Its Definition and Meaning

February 19, 2010

Yield Spread Defined

Yield Spread: 1. A payment from a mortgage lender to a mortgage originator which is equal to a small percentage of a mortgage amount, normally 1% to 3%, determined by the difference (the “spread”) between a wholesale interest rate and a markup to a higher-yield retail rate. 2. Broker compensation based upon the spread in the yield between the wholesale and retail rate.

Please see the two examples below which summarize the choices a consumer makes when taking out a new mortgage.

The choice is between having the lender pay for the expense of the new mortgage — paid with a fee called yield spread. Or the consumer can pay for the loan with their own funds — paid with a fee called points. Loan # 1 is a no-cost mortgage, but has a higher rate. The mortgage costs $33 a month more than the second choice. Loan # 2 costs the borrower $6,000, but has a lower rate. The borrower saves $33 a month, but their mortgage balance is $6,000 higher.

The best research on the subject says borrowers almost always do better by using yield spread to pay for their new mortgage (click here to see a write up on the research). It’s the right choice in 98 of 100 mortgage loans. I always recommend it because I think a low-cost or no-cost loan should always be a client’s high priority.

If you have any questions about taking out a new mortgage, please call me, Michael White, toll free at 877-420-8667.

2 Comments
  1. interestedReader permalink
    February 23, 2010 12:33 pm

    I find it interesting that this is even an “issue”. Prior to the insanity of the past several years, this is how mortgages worked. You either paid points to get a lower rate, or took a higher rate to avoid points. Perhaps I’m being too simplistic…

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