What is a yield spread premium?

A yield spread premium refers to the extra amount a lender pays a mortgage broker for originating a loan at a higher interest rate than the lowest available rate. In this context, the borrower chooses to accept a higher interest rate in exchange for reduced closing costs or a credit towards closing costs. This arrangement can help borrowers who may not have significant funds available at closing or who prefer to keep their upfront costs lower.

When a lender offers a loan with a higher interest rate, they typically compensate the mortgage broker with this yield spread premium. It serves as an incentive for brokers to suggest higher-rate products, allowing borrowers to finance their closing costs over the life of the loan. Therefore, the definition aligns with the context of the mortgage industry, making it an essential concept for understanding loan structures and borrower options.