What Are Points? Asked the Home-Buyer…

Jon - Greatings from Ex Belmont Hts neighbor......truly miss 2nd street. Points are now an agreement between a lender and the LO. Every quarter we must declare what our commission is going to be. My company we average about 2.5% with our lenders.  Once established with the lender for the quarter this none negotiable until the quarter ends. Say I'm going to make $12,000 on a loan that I really would only feel comfortable charging about $5000 because the file was a slam dunk. In the past I could do that but not now. So with Lender A I have an agreement at 2.5%. Todays rate sheet says: 3.750% rebate is .l25% 4.000% is rebate 1.875% 4.125% rebate is 2.750%. My 2.5% is paid out of the rebate. If borrower wants 3.750% and rebate is .125% then the cost to him/her would be 2.375% (.125 + 2.375=2.5%). If borrower will take 4.125% with rebate of 2.750% (minus my 2.5%) then borrower will receive a credit of .250% which will be applied to reducing his/her closing cost. The only way my commission would be affected is if borrower decided to put more down, thus lower loan amount equals lower commission and I can not raise my 2.5% to make up for the loss. On the other hand borrower decides to put less down which raises the loan amount thus my commission. This is also referred to as lender paid....if we go borrower paid the interest rate will be less, but the commission is not built in,  and will increase closing cost to cover my commission. However at this point the commission is negotiable. But gone are the days where we could have the lender pay part of the commission and borrower pay the difference. Its now all lender paid or all borrower paid. I could go into the scenario that borrower doesn't have the cash to pay the commission so we raise the interest rate, to increase the rebate from the lender, to cover the commission at close of escrow but that leads down another dark path that the Dodd Frank fiasco has brought us too

Great job explaining something we talk about every day but goes over the heads of so many buyers and sellers. I will say the vast majority of loan I have closed had no points and the lender does a good job explaining it to the borrower.

It's all very confusing to me, but this helped.  Thank you!  I'm just glad I don't have to deal with it everyday!

Jon, excellent post. I will always tell my clients to ask a lot of questions and don't let anyone try to gloss over the answer. Asking about points and the way they will impact their monthly payment is important an if they have to ask about the lender getting a higher commission because of points they should call the LO on that or find a new one.

Perfect information for first time buyers who are greeted with the confusing side of lending.  

Jon Kolsky perfect timing for your feature. You have a simple, much simple explanation and John - in his featured post has little more details!

Jon, in the end, that's what it comes down to--home buyers doing a bit of "self" educating and shopping around before commiting themselves to a mortgage and/or a specific lender.

Jon, well done on this is a short, digestable explanation for the average homebuyer. Congrats on the feature!

Half a point off $500k could save you thousands and thousands of $$$$

Bookmarked!! Great explanation; thank you! 

Jon -- It's a 'point' that buyers need to totally undertstand.  Good, easy to understand info in this post. Thanks.