Well, okay then. I guess you're paying cash because everybody who borrows money from a broker, lender or bank (regardless of their misleading advertisement) pays points. Simply defined the word points means a percentage. What they are a percentage of is the next question. And, in this case, they are a percentage of the loan amount.
For example if we are talking about $100,000 and we say "one point" we mean "one percent" or $1,000 (one thousand dollars). If we say "two points" we mean "two percent" or $2,000 (two thousand dollars).
Since we know what a point is (1 point = 1 percent) and we know what it is based on (the loan amount) why exactly are points charged and why is it a good or bad thing? To the mortgage insider there are lots of points. There are origination points, there are discount points, there are yield points and there are service release points. Some of those points are directly visible to the borrower(s) and some are not so let's take them in order.
Origination Points - this is your loan officer's paycheck. She does not get it all (usually) but rather splits it with other people. Even if she does keep it all she has some other fees to pay out of it to her broker or lender. When people say, "this is a no point loan" they are not talking about this fee. They are talking about ...
Discount Points - this is the fee to buy the interest rate down. In plain language if you are offered an interest rate of 5.5% and you want the interest rate at 5% you will pay discount points or buy down points. On a purchase loan this may be paid by the buyer(s) or the seller(s) where permitted. Again 1 point = 1% of the LOAN AMOUNT. This is the fee almost everyone except mortgage industry participants are talking about when they say, "I'm not paying any points!"
The tricky part about "discount points" is it costs more than 1% of the loan amount to "buy down the rate" 1% - so you don't pay 1% of the loan amount to go from 5.25% to 4.25%
An example of discount points not intending to confuse: Say your loan amount is $100,000 and the interest rate is 5.25% but you want a rate of 4.625% - every loan officer will know exactly what these numbers mean. If they don't then they are not, in fact, a real loan officer. But I digress. The RATE column is obvious. The 25d column means once that rate is "locked" the file MUST be closed in 25 days or a rate lock extension must be purchased.
The -1.000 in the 5.250 row and 25d column means there is a cost to the borrower of -1% of the loan amount. Since the cost is negative one percent that means one percent comes back. Generally that would be shown on the mortgage broker's HUD1 as 1% of the loan amount in YSP. So if it is a $100,000 loan that would be $1,000 to the mortgage broker. You won't see it at all if it goes to the bank or lender.
The 2.125 in the 4.625 row and 25d column means the rate of 4.625% will cost 2.125 percent of the loan amount PLUS the 1% of the loan amount the broker won't be making. So in this case it will cost the borrower 3.125% of the loan amount to "buy down the rate" to 4.625% (there are many other ways to slice this pie but you don't have the patience and I don't have the time for the full book version :)
In the above example on a $100,000 loan to "buy down the rate" from 5.25% to 4.625% would cost the borrower $3,125 - on a refinance this could come from the new loan and on a purchase it can be paid by the seller or the buyer depending on loan guidelines.
Yield Points - called Yield Spread Premium, are probably the most maligned and possibly misunderstood "fees" there are. Funny thing is it's not a fee. What many bankers, bloggers and ill informed talk show hosts (plus a so-called "Real Estate Expert" on About.com) either do not understand or simply choose to lie to you about is these are the only "back end points" ever revealed to the borrower. Has YSP been abused? You bet! But bankers abuse rates and never tell you how much profit they are making. I know, I are one. I have also been a broker. If your rate is competitive you really should not care at all about these points. If you disagree or do not understand call me and we can chat.
Release Points - called Service Release Premium, are the most ignored points even though they are virtually identical to Yield Spread Premium listed above. For secondary marketers and mortgage bankers there is a huge difference between the two but to the end user really the are very similar. Both affect the interest rate paid by the borrower and the profit made by the lender/banker/broker. What should matter to borrowers is 5% 5.5% 6% - whatever the rate is and your other closing costs.
One of the big problems with mortgages is so many people have no idea how to shop for one. They think if they know the words, "points" "rate" and "closing costs" they know everything needed to know. What they really do when they ask those questions in the wrong manner is tell a savvy loan officer just how little they know. They would be better served by saying, "tell me about your mortgages and all the costs associated".
You are going to pay points one way or another. Either you are going to pay a higher interest rate, your loan amount is going to be increased or you are simply going to pay them exactly as they are.
Let me interject a note about "hidden fees". It is not that hard to have "hidden fees" on loans but even with "hidden fees" you can still shop if you look at the three most important numbers: How much money you have to bring to the closing table, your total loan amount and your monthly payment (and whether or not that payment can ever change). For example if your loan is $100,000 and you have to bring $10,000 to the closing table and your monthly payment is $500 for one loan but for another loan of $100,000 you have to bring $20,000 to the table and your monthly payment is $550 - YOU have to decide which one works for you. A true mortgage professional can advise you. Don't fall for some hopped up claims like, "all of our fees are up front" or "we have flat rate mortgage fees". So? So what? That in no way qualifies that company as more honest or trust worthy.
If you want to know how to shop for a mortgage, even if you are not in my market area, I will be happy to speak with you. Just give me a call and ask! Maybe I should write another post about how to compare mortgages ...
Ken Cook - Georgia - FHA, USDA, VA and Conventional Home Loans (678) 439-8683
36 Comments on Closing Points, Origination Points, Discount Points ... What are points?
OCT
29
2009
This is great -- so many people have a difficult time getting to the point (sorry)! It can be very confusing to borrowers and this is very instructive.
Ken: I appreciate the detailed explanation here. I like that you are suggesting that people ask for a menu of mortgages and the "costs associated." An agent I know suggests borrowers also ask about "margins." Is this profit margin? What if a borrow asks how much the broker is going to make on the loan? Agents reveal the dollar amount they will wind up with....why shouldn't a lender do the same?
Kirsten - interesting that an agent would suggest asking about margins. They have no real meaning unless one is shopping between Adjustable Rate Mortgages and even then they are effectively unimportant when compared to the rate. Margins are generally 2.25 across the board but that number really doesn't have a lot to do with shopping for a mortgage. Brokers always disclose how much they make - it's a federal law. Lenders do not. In defense of lenders we don't actually know exactly how much we are going to make where a broker does. Thanks for your appreciative comments.
So often lenders try the old "No Point" stuff and then slip in "One Origination Fee".
A POINT IS A POINT IS A POINT. A fact that I have to information buyers because the lenders the buyers are shopping don't.
It also gets interesting when we break down the difference on the APR.
Life is an adventure.
How about writing about lender fees??? In the past two weeks, I've seen GFEs with lender fees of $278 and $1,700, with the same rate/points. That's money out of pocket at closing.
Points will become much clearer in January when we all have to use the new GFE and TIL. The new GFE will make all lenders show the total fees and points that the lender is charging in one clear way. This will allow the borrower a much more clear understanding of what they are actually paying to get their loan.
Ken: This is a great explanation... probably one of the best I have seen. Well-written, and, although more easily understood by some "veterans" than others... I think there is something for everyone to learn in your write-up. Thanks so much for sharing.
Ken (and Craig): I think one problem that I often see with more experienced loan officers... is that they often throw around "industry lingo"... and forget that usually the people they are talking to... "aren't" in the industry. An example, Craig... is TIL. I know that means Truth in Lending... but most folks do not.
I think if lenders... when talking to borrowers, and to some Realtors... would "catch themselves" when they use such "industry lingo"... and stop and explain what it means... things would go more smoothly for all concerned.
Margins???? I've used margin info for ages to get lender credits. When one of my buyers is using an ARM and we're really tight on cash but have low ratios, we can often get a lender credit to help with closing.
Good post. Even calculations such as APR can be confusing. I wrote a post about APR and how it can be misleading. It is also confusing because there are some items that are closing costs which are lender or broker fees such as application fees, processing fees and underwriting fees and some items which are not such as title fees, mortgage tax, recording fees, etc. There are also items that are not technically closing costs but are called items paid in advance such as escrows, upfront mortage insurance, short term interest. To the borrower all these charges are indistinguishable because no matter what you call it, it comes out of his pocket.
Great explanation. When customers shop for a loan they often go into what I call financial paralysis. Points, no points, junk fees, floating rates, lock rate?
The great news is that in January all GFE's will be uniform and the playing field will be level. Too many times the GFE does not match the Truth in Lending.
Customer is buying a home or refinancing and Broker throws an extra point on the loan knowing the customer will not walk. They can still do this today as long as the TIL is disclosed properly.
Jan 1. 2010 the GFE will need to be compliant. Sorry no more BAIT AND SWITCH BROKERS! This business needed to be cleaned up from Loan Hacks. These are loan officers that are in the business for 3-6 months and leave.
Good luck to everyone.
Integrity, Respect and Dedication to the Customer.
Thanks for the great and informative post. Too often we run into clients who have already chosen a lender and have no interest in getting a second opinion.
Thanks for the great and informative post. Too often we run into clients who have already chosen a lender and have no interest in getting a second opinion.
Ken... I appreciate you posting this information. I found it very insightful. It helps me understand the loan process much better. I can see how there can be a huge disconnect between people who "think" they understand the process and those that actually do. Again, thanks for the great info!
Ken...Great information. There is a lot of confusion when it comes to points and this a great way to explain it in a simple way...yet it almost took a full page! I try and do my best to explain them to clients and I would love if every customer said "tell me about your mortgages and all the costs associated" to every one they speak too. That one quote alone drove the point (no pun intended there) home. Excellent job.
Ken - Great breakdown of the various percentages that go hand in hand with rates/margins. I hope you've gone over to the Federal Reserve Board's comment board to share your position on R1366! And, I'd love to hear what your position is.
I tell every borrower that everybody gets money from the same place and that every lender pays the same for the money. There is no special cut rate place to get money and every lender is going to make a profit.
Ken - Great explanations - points are always tricky. I think it would be a great idea to write a post on how to compare mortgages and how to look for "hidden costs/fees" as well!
"Let me interject a note about "hidden fees". It is not that hard to have "hidden fees" on loans but even with "hidden fees" you can still shop if you look at the three most important numbers: How much money you have to bring to the closing table, your total loan amount and your monthly payment (and whether or not that payment can ever change). For example if your loan is $100,000 and you have to bring $10,000 to the closing table and your monthly payment is $500 for one loan but for another loan of $100,000 you have to bring $20,000 to the table and your monthly payment is $550 - YOU have to decide which one works for you. A true mortgage professional can advise you. Don't fall for some hopped up claims like, "all of our fees are up front" or "we have flat rate mortgage fees". So? So what? That in no way qualifies that company as more honest or trust worthy."
To the consumer, "POINTS IS POINTS" You pay "origination" and "discount"points! The bank pays "yield points" (YSP) for you, to save you closing cost in exchange for a slightly higher rate.
Those "free" loans are really the ones with the "negative" points so that the broker is paid up front by the lender... Notice how the rate is higher? That means that free will cost you EVERY month...
Ken, thank you for a great post. I really enjoyed your breakdown and am going to share this with my local agents. Are you going to post about the new GFEs when they come out?
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This is great -- so many people have a difficult time getting to the point (sorry)! It can be very confusing to borrowers and this is very instructive.