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Gregorio Denny's Blog

By Gregorio Denny | Mortgage Broker
or Lender in San Diego, CA

Understanding Interest Rates

I often get asked by consumers; "what's your rate today?" There really is no good answer to this question because technically, all rates are available every day. Since there is an associated cost to acquire each interest rate, the correct answer should be; "any rate you want." Rate sheets have a range of interest rates listed and a cost associated with each; some costs are positive and some are negative. Selecting a rate with a negative cost would "rebate" a percentage of the loan amount back to the broker and thus, to you. This rebate is called "Yield Spread Premium".

For example:

4.375% = +.5% (cost of 1/2 point)

4.5%% = 0% (no points)

4.625% = -.5% (rebates 1/2 point)

4.75% = +1% (rebates 1 point)

Note: These are only examples and not necessarily accurate based on current rates.

In the above scenario, if you selected 4.375% you would have to pay 1/2 point (.5%) of the loan amount to get this rate on top of your other closing costs. If you selected 4.5%, there are no points to get this rate and it's called a "par" rate. If you selected 4.625%, you would get .5% of the loan amount rebated to you, to go towards closing costs, so your overall costs would be less. If you selected 4.75%, you would get a full 1% (1 point) rebated to you to offset other closing costs.

Choosing which rate works best depends on your long and short term goals. Paying points to lower rate may be a good move when staying long term while using YSP to your advantage and lowering closing costs can be an effective short term strategy. As of January 1, 2010, all YSP is to be credited to the consumer, so you need to be careful who you work with and make sure you understand how this works. To better familiarize yourself with the new Good Faith Estimate, read Understanding the New GFE to make sure you are getting the credit you deserve.

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