Today’s post was written by my friend Brett Reichel, another great Loan Officer here at Pacific Residential Mortgage. Thanks Brett!
Your Senator and Congressman hate the yield spread premium…..because they don’t understand it, and they don’t understand why a yield spread premium could be beneficial to a borrower.
A yield spread premium is the only time that your mortgage lender will pay you! That’s correct it’s an opportunity to GET money from your mortgage lender. But why would your mortgage lender pay you money?
A mortgage lender pays a yield spread premium to a borrower when the borrower accepts a higher interest rate. The lender can sell the loan for more money at a higher interest rate, and they pay money to a borrower to induce them to take a higher interest rate.
Why would a borrower accept a higher interest rate? There are actually several reasons.
1 – Closing costs are expensive. A borrower might take a higher rate to offset their closing costs so that they have to bring less money into closing.
2 – The borrower might have a short-term ownership in mind. Oftentimes, if you are planning on staying in the house only 4 to 7 years (the math varies), it makes sense to take the yield spread premium and higher interest rate. It can take 4 to 7 years for the payment savings to add up to the amount of money you can get credited to your closing costs.
3 – Sometimes, as amazing as it sounds, a higher interest rate can result in a lower monthly payment. How? By taking a yield spread premium and buying a single-premium mortgage insurance policy. This strategy eliminates more expensive monthly mortgage insurance and can result in huge savings in some circumstances.
So, despite what Grand-dad, your Senator and Congressman say, sometimes it’s smarter to take a higher interest rate and use the yield spread premium to better your financial situation!