What is a higher interest rate charged on a loan in exchange for lower upfront closing costs known as?

The term for a higher interest rate charged on a loan in exchange for lower upfront closing costs is known as a yield spread premium. This concept refers to the practice where lenders increase the interest rate on a loan in order to provide a credit to the borrower that can be used to cover some or all closing costs. The borrower benefits from having lower or no initial out-of-pocket expenses for closing, but this is offset by a higher long-term interest payment over the life of the loan.

The yield spread premium allows lenders to generate additional earnings on the mortgage by marking up the interest rate, which can be particularly appealing to borrowers who may have limited funds for upfront costs but are able to afford higher monthly payments. This financial arrangement is important to understand as it reflects the trade-offs borrowers must consider when evaluating loan options.