Premium Rate Credits

A Premium Rate Credit, formerly know as Yield Spread Premium (YSP), is a credit expressed in the form of a percentage of the loan amount, paid directly to the borrower for taking any interest rate that is above par pricing. In other words, if a borrower elects to take a par priced loan, he/she will not have to pay discount points, nor will they receive a Premium Rate Credit. However, if the borrower wants a lower rate than par, he/she will have to pay discount points (a percentage of the loan amount) to buydown the rate lower, conversely if the borrower accepts a rate that is higher than par pricing, they will receive a premium rate credit for doing so (ther reverse of paying discount points).

Premium Rate Credits (PRC) are a percentage of the loan amount, and they increase invalue as the rate moves higher. The cash generated from this activity, takes the form of a Lender Credit and may be used by the borrower to pay some or all of the closing costs of the transaction.

Direct lenders such as banks, savings and loan associations and mortgage bankers, who fund loan transactions from their own depository base or credit facilities are excused from disclosing the available interest rate premiums, however they are quickly discovering the importance they play in mortgage transactions.

Yield Spread Premiums

Prior to the reforms of the Dodd-Frank legislation and RESPA, Yield Spread Premiums were captured by lenders, bankers and brokers and retained as an increase margin of profitability, and used to increase commissions to sales personnel and managers which resulted in encouragment of up-selling the borrower. These premiums which are now referred to as premium rate credits, belong to the borrower entirely, as they should for taking a higher than market interest rate. The premium, if there is one, can be referenced on the new good faith estimate form as a lender credit for a specific interest rate chosen.

APR and Costs

APR, which stands for Annual Percentage Rate, is a method by which consumers can compare all costs of a transaction as expressed by an interest rate over the whole term of the loan. Unfortunately, APR does not take into account all costs of a transaction, but it does help for general comparative purposes. In the case of No Closing Cost transactions (NCC), it is very easy to compare loan offerings, the APR is the same as the interest rate. The entire cost of the transaction over time is the interest rate, no other fees.

There is a cost to NCC loans, because the interest rate is higher than it would be if you were paying the standard fees and costs. But it certainly makes it a lot easier to compare loan offerrings because its all centered on the interest rate; if lender 'A' quotes no cost at 4.500% on a 30 year fixed rate mortgage, and lender 'B' quotes 4.750%, for the same program,lender 'A' wins.

Remember that prepaid expenses are not considered closing costs as these are expenses you would have anyway, regardless of borrowing. Such expenses include; property taxes, insurance premiums and back or future per diem mortgage interest payments.

In evaluating the benefits of No Closing Cost transactions (NCC), compare the payments of the two options, paying points and fees and no costs. See what the monthly savings are for taking the lower rate, and then divide the monthly savings into the bundle of costs for the lower rate. In most cases, it will take years to recover the monies spent on closing costs. And, don't forget the income tax benefit, or lack thereof, as many people especially those in higher tax brackets may be affected by paying costs or taking higher mortgage interest deductions.