We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Yield Spread Premium?

By Bradley James
Updated: Feb 20, 2024

Mortgages are a special kind of loan made specifically to purchase a house or real estate. Lenders use the property as collateral against the loan. In return, the lender can loan out more money to the borrower at a lower rate of interest. Mortgage brokers make money from selling mortgage loans to potential home buyers. The mortgage broker's profit is referred to as the origination fee or the yield spread premium.

The idea or concept behind the yield spread premium is to motivate mortgage brokers to sell loans. Government Sponsored Entities (GSEs), including Fannie Mae and Freddie Mac, commonly use yield spread premiums to incentive mortgage brokers to sell a particular loan type. The mortgage broker, in return, pushes a certain loan type to the borrower. For example, a loan that is $100,000 U.S. Dollars (USD) with a price of 101.00% yield has a built in rebate to the originator of the loan worth 1 percent of the value of the loan; the originator is the mortgage broker or the retail bank providing the loan.

For example, GSEs may want to steer borrowers into a certain interest rate class. In order to incentive mortgage brokers to promote this class the GSEs will increase the yield spread premium for interest rate they are targeting. For instance, a 5.00% loan may have a yield spread premium of 1%. However, a 5.50% loan will have a yield spread premium of 1.24% and a 6.10% loan may have a yield spread premium of .95%. There isn't always a clear link between the yield spread premium and the interest rate that the borrower pays.

Yield spread premiums are also used as a way to incentive mortgage brokers or retail banks to originate more loans for particular loan programs. For instance, longer term mortgages with fixed rates often pay a much higher yield spread premium to the broker than a mortgage with a shorter term or an adjustable rate. The link depends on the loan program the GSE is promoting.

Yield spread premiums, used as a tool to incentive mortgage brokers, are not inherently bad. The concern among regulators is that lenders and brokers may not be disclosing the dollar amount of the premium on a fair and consistent basis. Due to laws in the U.S, mortgage brokers are required to disclose the yield spread premium on the truth in lending document which must be initialed by the borrower prior to starting loan paperwork.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.