Add On

Author: Terri Ewing | Date: September 5, 2008 | Filed In: Glossary

Add On Defined

An add on is a cost to the borrower for risk-based conditions on their mortgage like cash out, investment, FICO scores, minimal down payment or equity, and waiving escrows. The add on is charged as a percentage of the loan amount as a discount point, at the time of rate lock, if you are made aware of it…which is unlikely.

The problem with most mortgage originators is they don’t tell you about add ons. They just tell you the rate is higher. If they opened up the discussion about add ons with respect to yield spread premium, it would open up a can of worms. You would definitely have more questions and they don’t want you asking too many questions about how rates are really quoted.

For example, you are refinancing using a cash out mortgage. The add on for a cash out mortgage is .500%. You could pay the .500% as part of your closing costs and get the lowest rate. Your loan amount is $100,000 so to pay the add on you would owe $500. Your other option is to increase the rate and use yield spread premium to pay for it.

If the par rate was 6.00% and 6.125% paid back .500% in yield spread premium, then you could use the yield spread premium from the 6.125% rate to pay the add on of .500%. (.500% ysp - .500% add on is zero so you don’t pay out of pocket at close).

Author: Terri Ewing