I have learned many things on Active Rain and also had my thoughts confirmed here. That has some of the highest value of anything I can attribute to AR. Yes, the networking is phenomenal but if we were all just talking about American Idol or NASCAR we wouldn't be growing as a community of real estate business people and leaders. So, keeping in that vain let's talk about the myriad different types of POINTS on a mortgage and why you, whether you are a loan officer or real estate agent, need to understand the differences.
What's the POINT? Basis, spread, yield, BIPs, discount ... You Need To Know
There are things I don't know that I need to know ... that I don't even know I need to know. I mean I need to know things I don't even know about knowing. You known what I mean, right? The first step to learning is to admit, "I don't know". Once that's over with I can begin to learn.
Two things always kind of give me a chuckle, people who honestly don't know and are just operating off "hear-say" who honestly want to learn and people who act like they know to your face but head for Google as soon as they leave. I'll admit, I've done both.
We received a called the other day and the man wasted no time in saying, "I want your lowest rate with no points." Being the happy little snot I am I said, "no which points?" I already knew that would fluster him and that's why I asked. He really didn't know what a point was. So I expanded a bit and asked, "No yield points, no discount points, no origination points? Which points would you like to not have? I only ask because the real answer depends on what you are asking for." And the real answer DOES depend on what the caller was asking for.
Let's get to the point (too many puns available for this topic)
Discount Points - almost all crazy low rates you see advertised are either teaser rates (start rates) or rates with discount points (rate buydowns) to get the lower rate. We'll go with the rate buy down or discount points. Let's say the par rate* for today is 6% but you see an add for a 5.5% rate. All the other lenders are advertising 6% but this one lender is advertising 5.5% - they are able to do that because you are going to buy the rate down with discount points. In the example give it is probably going to cost you 2% of the loan amount (advanced interest) to get the rate down from 6% to 5.5%. As a general rule it's 4 for 1 - 4 discount points will get you one percent reduction in interest. So on a $300,000 loan to save .5% on your interest payment it would cost you $12,000.
Basis Points - you really never will hear about Basis Points or BIPs unless someone is using the term incorrectly. A Basis Point is 1/100th of a point or .01% - I have had people call and say, "I'm not paying more than 6 basis points for my loan." Wow, that's cheap. What they are meaning is 6% but what they are saying is .06% - point zero six percent or 6/100th's of a percent. Loan officers need to understand because we do talk about 50 basis points or 400 basis points from time to time.
Yield Points - in mortgages this generally refers to the much maligned on false pretenses Yield Spread Premium. Yied points, in reality, are your friend. The lie is that only mortgage brokers charge them - that's actually a full fledged lie wrapped in an onion skin of the truth. Yield points are actually just profit. The idea that lenders "rebate" money to brokers is ridiculous. Brokers set the yield and lenders pay them what is due. The reason YSP is your friend is because SOMEBODY is paying closing costs and it costs about 3 percent to close the average $240,000 or so loan. The lower the loan amount the higher the percentage and vice versa. That loud mouth little bald headed piece of tripe on the radio doesn't pay your closing costs, you do - over the life of the loan. He jacks up the rate enough to earn more yield. His process is not "his" ... every broker can do it. I just like to pick on him because he's a little twit.
Closing Points - this is generally all of the settlement costs rolled into one number. If someone says, "I bought a house with only 2 points at closing!" and another says, "Good gosh! My closing points were 8!" you can't really know who paid more. The guy who paid 2 may have had a $1,000,000 loan while the guy who paid 8 may have had a $5,000 loan. Do you know it costs just as much to originate, process, underwrite and fund a $1,000,000 loan as it does a $50,000 loan?
So I hope I've pointed out the difference between points. I tried not to beat around the bush and get straight to the, well - you know, point.
*Par rate is the wholesale rate at which money can be lent without any yield spread points. To get the par rate you will have to pay origination points (part of the closing points). Mortgage brokers generally need to make about $2500 per loan just to keep the doors open. Nobody is getting rich at $2500 per loan ... that's the MINIMUM. If you don't have a plain jane loan it's going to cost the mortgage broker more to "do" your loan and since they are in the business for a profit that cost will be passed along to you. Funny, they still beat the bank more than 1/2 the time so if you haven't shopped with your local mortgage broker ... get to it!
You can always check daily rates here and they always are with no discount points and show the APR.
WEDNESDAYS AT 4 PM EASTERN
Topics include the real estate market in general, interest rates, short sales, declining markets, buyer trends and much more!
Hopefully I'll see each of you there and I want to get around to each of you as a guest speaker as soon as we get the bugs ironed out.
(You'll have to follow one more link from that site for now. Hope to have that cured very soon!)
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