Loan originators are paid by the investor to sell an interest rate higher than the wholesale interest rate. These fees are in addition to any loan origination points charged on a mortgage. Rates above “par” or the wholesale rate pay the originator a fee known as the Yield Spread Premium, or YSP. Rates below par cost the originator money to buy it. Mortgage investors provide mortgage companies with rate sheets that detail the rates for that specific day. Rates can and do change daily, sometimes even more often depending on the financial markets.
Make sure you have the correct rate sheet for the day you locked in the interest rate. If the interest rate has not yet been locked in, use the most recent rate sheet. Interest rates generally change daily, but may change more than once a day when markets are volatile. Usually, the lender’s website has the most recent rate sheets available.
Locate the required mortgage program. Since many rate sheets contain multiple programs listed on multiple pages, it is beneficial to verify that you have the correct program. Locate the adjustments required for the loan and write down any adjustments required for your particular situation. Adjustments can relate to the loan amount, credit rating, the condition of the property, or even the type of property.
Determine the “even” rate, or the rate closest to neither paying YSP, nor requiring payment to get it. Many times there will be no real nominal rate. Investors provide rates in a grid with decreasing interest rates at the bottom left and the lock-in period at the top. The blocking period is usually 15, 30 or 60 days. Par is most often expressed as 0,000 or 100,000. This is the true wholesale interest rate. Use the table to find which rate at the bottom left and which lock period at the top meet on the grid with a number closest to 0.000 or 100,000. This is the normal or near par rate for this program.
Determine the actual requested rate and the blocking period. If the number in the grid reads “(1,250)” or “101,250”, this would indicate that the rate is paying the lender 1.25% of the loan amount. If the numbers next to the rate read “1.25” without the parenthesis or “98.75”, that loan would cost the mortgage company 1.25% of the loan amount to purchase that rate.
Apply adjustments to the number in parentheses, not the interest rate. An adjustment of -0.250 because a loan has a high credit score adds up to (1.250) or 101.250, making it (1.50) or 101.50 and increasing the amount owed to the loan company at 1.5% of the loan amount. An adjustment of 0.250 would reduce the YSP from 0.25 to (1000) or 101.00.
Apply the chosen rate to the loan and communicate it to the applicant. If the applicant wants a lower interest rate loan, reevaluate the loan price using the same formula and adjust other loan costs accordingly. If the requested rate is not available for this program, use the price list to find a program for which the rate is available.
- To easily compare the rates of multiple investors, create a spreadsheet that includes the lender’s adjustments. A lender’s base rate can be very good, but when adjustments are applied, it may not look as good.
- Always check the adjustments and the calculation. Call the mortgage investor’s foreclosure office or confirm the price with an official before locking the loan. It’s easy to miss a setting or use the wrong program.
Biography of the writer
David Rouse, currently residing in Raleigh, NC, has been writing and teaching homeowners about the mortgage industry since 1997. Rouse has written training manuals for mortgage professionals and has conducted information seminars for home buyers from a first home, providing sensible answers for a long and confusing process. He studied at Western Kentucky University.