Definition: The mortgage yield spread is a financial measure that shows how much more you pay for a loan than you actually receive in interest payments when compared to other similar loans or investments. It is often calculated as a percentage difference between the yield on the mortgage and the market interest rate. For example, let's assume that a 30-year fixed-rate mortgage has an annual coupon of $150 (per year) and the current interest rates are 4% for a 6-month period. The spread would be calculated as follows: \[ \text{Spread} = \left( \frac{\text{Mortgage Yield}}{\text{Market Interest Rate}} \right) - 1 \] This formula takes into account both the yield of the mortgage and the market interest rate, taking into account how much more you pay for a loan than you receive in interest payments. The Mortgage Yield is the percentage difference between the current yield on the mortgage and the 2% annual coupon rate on the same loan. The Market Interest Rate is the average of all similar loans that are offered by other banks or investment firms with comparable terms, such as adjustable-rate mortgages (ARMs). By comparing the spread to these two rates, you can estimate how much more you would pay for a mortgage with an agreed-upon rate compared to another comparable loan. This information is important in making financial decisions, particularly when considering purchasing a home or making other long-term investments.
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