Ingrid B. Quinn

NMLS ID #211652 Arizona, Loan Consultant


Leave a comment

Mortgage Points, What are They?

mortgage-points-600cs041712

Mortgage points generally refer to a loan origination fee and/or discount points. Discount points refer to the amount of money that a person pays to a lender to get a loan at a specific rate. Points are paid when discounting the rate for a loan. A lender usually has a menu of rates available on any given day at a variety of costs. Par pricing is when no discount points are required.
An origination fee is what a borrower will pay the lender for their services. Since the change in lending and disclosure rules in 2009, the term origination fee was changed to origination charge. The origination charge will include any lender admin fees and an origination point if applicable.
Before you can even consider whether or not purchasing points is a good idea, you have to make sure that you will have the extra cash because points will increase your total closing costs. Points can be financed into a refinance transaction but not into a purchase. Sellers can pay points for a buyer as part of a closing cost concession.
Positive mortgage points can be viewed as a form of pre-paid interest. Each point is equal to 1% total loan amount. Why would you want to pre-pay a part of your interest? The buyer is offering to pay an up front fee to receive a discount on the interest rate. The reduction in interest will give the buyer lower monthly mortgage payments. With mortgages duration of typically 15, 20 or even 30 years, the discount points will help save you a huge amount of interest over the life span of the loan. Positive discount points are usually worthwhile to a home buyer if he or she will maintain the mortgage for a while.
There is a second type of mortgage points, negative mortgage points or as termed, Yield Spread, work very much like positive mortgage points except in reverse. Instead of you paying the bank to lower your rate, the bank will pay you to take a higher rate. As an example, if you were offered a rate of 5.5 percent on your $100,000 loan. The bank is now offering you one point to raise your rate to 5.75 percent. Therefore, they are basically giving you $1,000 in order to raise your interest rate. This will also result in you paying a higher mortgage payment every month. These points don’t end up as a written check for the money. The yield will just be applied to your total closing costs on the loan.
Closing costs can result in a few thousand dollars of out-of-pocket expense. Amounts for closing cost vary by state, location and amount of loan requested. Purchase transactions and refinances can have a difference in costs too.
“Breaking even is a major factor in deciding what to do with points. Something the buyer will want to inquire about is how long it will take to “break even” in regards to possibly selling the home before their loan is paid in full. You will want to have retained the mortgage at least until you “break even”, if not longer, to make it worthwhile to reap benefits from discount points. Keep in mind there may also be a tax benefit to paying points and you will want to consult a tax advisor on this subject and what may be beneficial to your individual circumstance.
For questions of suggestions please feel free to email me at Ingrid.Quinn@cobaltmortgae.com or visit me at http://www.ScottsdaleMortgageExpert.com or http://www.CobaltMortgage.com/IngridQuinn