YSP and SRP
Completely understanding YSP and SRP is not critical in comparing rates/closing costs on a mortgage but a basic understanding can really help by understanding the relationship between Rate/Payment and Price/Closing Costs to determine what is the best deal for you.
Think of money or your mortgage as a commodity similar to a loaf of bread. You look at the shelf and there are 20 different loaves. Which one is right for you? Getting the super loaf with more slices for just a slightly higher price may be a great deal, unless you don’t use 25% of the loaf and throw it out. Your actual cost per slice that you used went up. How thick is each slice is? Rye? With seeds?… Don’t like seeds so it doesn’t really matter if it’s a deal if you don’t like it! OK, so size, ingredients, and type should all be as similar as possible in comparing different loaves of bread or mortgage loans. Now let’s assume we have made a decision and we are just looking at the price for a 30 year fixed loan or a 30 slice loaf of white bread and each Rate or Loaf has a price.
YSP- Yield Spread Premium
Interest rates never change. REALLY… 5.00% is always 5.00%. A 30 slice loaf is a 30 slice loaf. What changes is the cost of that particular rate or loaf.
Here is how a lender/broker may see pricing; This is a simplification of the actual process as there are many factors. 100=PAR and this is the price the Lender wants to achieve.
5.000% = price 99.000- The loan needs to get to PAR so in this scenario you would have a cost of 1 point (discount or origination) to reach 100.000 or PAR
5.000%= price 100.000– 100.000 would be considered PAR (even), You pay no cost and you get no YSP (credit)
5.000%= price 101.000- This scenario has a 1 point YSP premium (credit) that goes to you and can be applied to other closing costs. Sometimes called Premium pricing)
Simply YSP is a credit to you for a particular rate chosen over PAR. Less than PAR is a cost to you.
OK… so why should you care? Understanding how profit is made and expenses are covered is important in the structure of your loan.
How so? Let’s use and extreme case… A no closing cost loan. Let’s just assume costs of 3% of the loan. The cost don’t just disappear they are redistributed either by increasing the loan size by 3% or increasing the Rate to achieve pricing that would cover the cost with a YSP of 3%… 103.000
You can increase the loan amount or the Rate to lower your out of pocket costs! This will impact your payment so it is a matter of finding the best balance for you cash vs payment.
So rates/price may look something this:
- 5.000% = 98.900
- 5.125%= 99.500
- 5.250%= 100.00 or PAR
- 5.375%= 100.780 or .780 YSP
On a $100,000 loan .780 would be $780 credit to you!
NOTE: PAR is in regard to rate and pricing and you may also have FEES like appraisal, underwriting, origination, credit reports, tax service and others. We will discuss these in the closing cost section.
SRP- Servicing Released Premium
The Servicing Released Premium is not disclosed. It is a profit made on the sale of the servicing. The servicer is the person who collects your mortgage payment. They keep a small fee from each payment and then forward the payment to the note holder. Most lenders sell the NOTE (loan) and they then may keep or sell the servicing separately. When people talk about their loan being sold we are really talking about the servicing.
NOTE: If your loan or servicing are sold it can change nothing on your mortgage, except where you send the check!
Many Borrowers do ask about APR (Annual Percentage Rate) and YSP or discounts may play a role in determining the loans APR.
Click to find out more on “APR”