Free Mortgage Step Right Up!Definitions Continued:Origination, YSP, and Discount

Extra, Extra, read all about it! We got your free mortgages over here! No cost, no fees all we need is for you to apply and voila. I am sure that you have heard of the infamous no cost mortgage. You know the one that costs you absolutely nothing. Yeah that one. Oh you got one of these before. I am so sorry to hear that.

The truth is there is no such thing as “no cost.” I know surprise surprise. It is quite often that we come across consumers that have been told about the “no cost” mortgage. It could not be any further from the truth. You see the illusion in the trick is that there are third party vendors that are not part of the Mortgage per se that want to be paid. Examples of those professionals would be the appraiser, the title company, the termite guy and the credit vendor to name a few. Ask you mortgage consultant about the “no cost” mortgage and see what they say. 

This blog is not about the “no cost mortgage though. It is a continuance on the series of definitions. Today we will take a look at the different types of ways that your mortgage professional is paid. There are three terms that you will commonly hear:

Origination –  Loan origination is the fee that is charged by the Broker or Banker that you are working with. Commonly, this makes up a portion of the broker or bankers commission. When applying for an FHA mortgage it is common to see 1% origination.

YSP or Yield Spread Premium – yield spread premium is an incentive that the wholesaler pays the broker for delivering a quality loan package and for locking specific rates. In general the higher the rate the higher theYSP. However, today’s market has changed YSP and many times the previous statement no longer holds true. There are several reasons for this but one of the reasons is that investors are afraid of an early pay off. See if they are to offer large incentive to sell higher rates and the rates remain low, there is a likelihood that the consumer would refinance to a lower rate. When the consumer does this early on in the loan it is called an early pay-off. An investor who has paid a large incentive for the higher rate will not have held the investment long enough to recoup the pay out resulting in a loss on the investment. It is common to see incentive be offered at the rates that are selling in the secondary market.

Discount – This is the opposite of YSP. Discount is paid to the investor to obtain a lower rate. It is essentially pre-paid interest. If you are willing to pay more money up front to the investor then they are willing to discount the note rate. This process lowers your monthly payment but increases the upfront costs of the loan. Discount will be made payable to the wholesaler that you are obtaining the loan through.

You cannot have discount and YSPon the same loan. However, origination can be seen with both discount and ysp. The broker has a percentage that they make on the loan. Many times that is with a combination of loan origination and ysp. In some cases the math would point to paying all origination for the broker/bankers fee so that the rate is lower and there is no YSP.

How do you know what is right for your loan? Consult your professional but also ask yourself the following question? How long do I see myself in this home and this loan? The answer to that question will help your professional show you the appropriate combination. After all, it is simply mathematical. The numbers never lie and they will tell you what is right and what may not work.

As Always thank you for tuning in.

All the best,

freeman_signature1

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