What is the significance of a yield spread premium in the context of closing costs?

The significance of a yield spread premium in the context of closing costs lies in its relationship with the interest rate and how it impacts the borrower’s loan. A yield spread premium occurs when a lender offers a higher interest rate to a borrower than what they might qualify for and, in return, the lender pays a portion of that difference back to the borrower at closing. This essentially means that the borrower is agreeing to a higher interest rate in exchange for receiving a credit that can be applied to closing costs.

When borrowers choose to have a yield spread premium, they are often looking to reduce their out-of-pocket costs at the closing table. The premium helps to offset some of the closing expenses, which may be appealing for those who may not have enough cash available at closing.

In summary, the yield spread premium acts as a financial mechanism where the borrower effectively accepts a higher interest rate, which allows them to receive funds that can be used for closing costs. Understanding this concept is crucial for borrowers when evaluating their loan options and determining what trade-offs they may be making with their interest rates in relation to closing costs.