My New Blog

To continue a discussion from yesterday regarding good faith estimates and yield spread premium.  New legislation wants to eliminate yield spread premium (YSP) which is indirect compensation that is paid to the loan originator based on the interest rate they secure for you.  I quote on my blog par interest rates which would pay zero yield spread premium to the originator thus the reason you would be required to pay all costs including a point to secure that rate.   If YSP is eliminated, then no cost loans and no point loans will go away.  You as a consumer will lose the ability to decide whether you wish to pay closing costs or decide not to.  Our current government is eliminating many consumer choices such as the ability for you to decide who appraises your home with the passing of the Home Valuation Code of Conduct and quite possibly the elimination of no cost loans.

Here is an example of the benefits of ysp.  Let’s assume a particular client has excellent credit, mortgage amount of $200,000, home worth $300,000 and a rate of 6.5%.   Let’s further assume that the loan amount started at $210,000 making the P&I payment $1327 and they only intend to stay in home for 1 ½ years.   They could refinance today by paying closing costs including a point, totaling $5400 fees, to 5% making payment $1100.  Now, does it make sense for this client to pay $5400 in fees to save (1327-1100) $227 per month. Well, $5400 divided by 227 gives a break even point of 23 months.  So, if this client only intends to keep home for 18 months, it makes no sense for them to pay costs and get the 5% rate. 

Now, lets say they do a no cost loan at 5.875%.  This would lower payment to $1183 but no costs would be charged to the client since the higher interest rate will compensate the loan originator enough money to pay the closing costs for the client and still make a profit.  This also allows the home owner to take advantage of a lower interest rate and lower payment thus benefiting their family’s financial position and also the overall economy.  A lower payment allows them to have more money to spend in the economy and by refinancing they are also allowing many people to keep their job.   Here is a link to H.R. 1728.  What are your thoughts regarding this topic?