Posted on: 25th Jun, 2009 08:49 am
Can someone please explain to me what yield spread really means. I've heard it before. What is it and how is it used?
The yield spread is the amount that the lender pays the broker to buy a loan. The amount is based on many factors, such as loan amount, income documentation type, loan to value ratio, etc.. However, the variable most often associated with yield spread is the interest rate.
For example, let's say that you are doing a loan and the broker has told you the rate is 6.75%. The broker already knows how much delivering that rate to a certain lender will pay him/her.
The amount could be:
Negative - if that were the case, then the borrower would most likely be paying a "discount" fee to buy the rate down;
Zero - the loan is considered to be at "par";
A positive number - this is the yield spread.
Using the previous example of 6.75%, let's say that the "par" rate is 6.25%. By delivering the lender a loan at a rate higher than par, they will pay the broker a premium of a half of a point. On a $400,000 loan amount, that amount would be $2000.
For a broker, this must be disclosed on your settlement statement, but it is not shown as a charge, because you're not paying for it out of pocket or through the loan. It is a POC item (paid outside of closing).
For example, let's say that you are doing a loan and the broker has told you the rate is 6.75%. The broker already knows how much delivering that rate to a certain lender will pay him/her.
The amount could be:
Negative - if that were the case, then the borrower would most likely be paying a "discount" fee to buy the rate down;
Zero - the loan is considered to be at "par";
A positive number - this is the yield spread.
Using the previous example of 6.75%, let's say that the "par" rate is 6.25%. By delivering the lender a loan at a rate higher than par, they will pay the broker a premium of a half of a point. On a $400,000 loan amount, that amount would be $2000.
For a broker, this must be disclosed on your settlement statement, but it is not shown as a charge, because you're not paying for it out of pocket or through the loan. It is a POC item (paid outside of closing).