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The Myths behind ZERO point mortgages instead of paying points upfront……

money

Mortgages and points, sounds like evil words, right?. It could save you thousands.

I have been doing this for almost 16 years now. When I first got into this industry, I heard client's lawyers and accountants tell their clients not to do mortgages with points associated to them. Or it was the typical family member or your next-door neighbor that got this great deal with zero points and that this was the way to go. Even the talk radio shows that might have been talking about one specific thing in regards to points and zero points, but that you came into the middle of the program. So who should you believe? Don't believe this.... "points are suppose to mean that we as loan officers make more money." Now, there are many that abuse points to make more money, but this should not be the norm. Paying points are suppose to pay your rate down.

question

One of my first questions when speaking to a client, refinancing or purchasing, is what their goals are for the near future and their long-term goals. Now, many of us don’t have these so-called crystal balls that many claim to have. Things can happen at any time. But I have a lot of passion in what I do and I care what I do, helping those clients to achieve their dreams. By giving them options in what kinds of mortgage programs there are and the costs behind these programs, I can help them achieve this dream and their goals.

For a complete break down on how points could be better, please click here : I am saving thousands of dollars and you aren't (opens in a new window) Are you throwing money out the window?

Posted by Jeff Belonger -- The FHA Expert.com -- FHA Loans -- FHA mortgages - USDA loans on 05/22/2008 01:10 AM

Comments (31)

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Originally posted at: FHA Mortgage Expert - Tri-State Area - New Jersey/PA/Delaware: The Myths behind ZERO point mortgages instead of paying points upfront……

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31 Comments on The Myths behind ZERO point mortgages instead of paying points upfront……

MAY

2008

Jeff: I think paying points makes much more sense if the buyer is going to be in the home for the long term... rather than sell in three to five years. I think the break-even point is about five years and eight months or so. If you sell before that, you lost money on the points. If you stayed longer, the amount of saved payment dollars became more than the money spent on the points. Please enlighten me if you have another side of this viewpoint. Thanks for sharing.

Hi Jeff,

I think that it is important that the person considering the mortgage speak to someone who has their best interests at heart. All options should be explained and considered on an individual basis. Your clients are lucky to have someone who will help them make the best choice for them.

As always, the people in the know - know! The ignorant folk are somehow louder!

Jeff:

I've paid points a number of times in the past and never regretted the financial benefits of doing so. Lookng at the overall financial picture and goals makes a keckuva lotta cents. :)

Jeff

KAREN..... my opinion? If you clicked onto the link at the bottom, it showed you that in that particular scenario that 3 years or less, you broke even. And the average time frame for breaking even is about 4.5 years on more than 50% of all scenarios based on 2 pts.

So if you didn't check it out, please read : The breakdown bewtween ZERO point mortgages instead of paying points upfront......

It might enlighten you a lot more than you thought.... thanks for stopping by and for your input.

PADDY.... I agree 110%.... I always ask my clients goals. What's sad is when a client is qualified for a $250,000 mortgage, but that they didn't want their payment to be over $2,200. And even at the lowest rate, with taxes and haz., the payment is about $200 more than what they wanted. But because the loan officer doesn't ask the appropriate questions, the client's emotions now kick in and say... okay, I love the house so I'll tough out the payment....

by paying points, it certainly can reduce that payment and save you money in the long run...

MATTHEW.....exactly.... we need more people as ourselves that understand this and consumers that will listen....thanks

JEFF D. ..... As long as it works for you. I had a consumer tell me that we made more money if I charged points.... it's just sad because of those that have ruined it for good... the true mortgage professional.

I like to provide a GFE with both points and with out . This way I can show the difference between the two deals.

I love it when people say: "I don't want to pay any points"..... it gives me a chance to educate them and show them that cousin eddie isn't as smart as he thought he was.

personally I think like you do - it all comes down to what works for the borrower - nicely done Jeff

MAY

2008

This is exactly what we suggest to our clients who plan on being in the loan for more than a few years. We always do the math and put it on an excel sheet so the borrowers can really understand the benefits.

The key is... give the borrower the information they need and let them make the choice that is right for them.

Great Post!

If only we made money with all those points. Realistically, I'm against points unless it's coming through a corporate relo program. Jeff, did you know tha thte national average for someone having a mortgage is just over 36 months. IT's been that way for a long time now. Most of the time it takes about 4.5 years to pay back the value of the point(s). Thereafter the homeowner / mortgagor is saving $. Soooooooo even though someone may live in a house 30 years, they probably will never get the value of the points back if that national average holds true you know.... Having said that, I just put 3 clients in loans with a point(s) over the last 3 weeks.... Thank God for relo.

SHAUN.... sounds great.... but you should show more than that. Not sure if you read the extension of this post. I am saving thousands of dollars and you aren't

Showing someone an amortization is also important, showing what the principal amount is at in a few years, showing that a lower interest rate pays it down.

TOM...... I love it to.... especially when they can tell you that they will be living in the house for over 8 to 10 years. People can actually predict this, especially if they have kids in school... from middle school to high school....

THESA..... yes, what works for the borrower and not just my pay check....

PATTI & DUSTIN...(pay it forward)..... so many don't give the consumer the information so they not only can make a decision, but understand the situation. Understanding is so important....and thanks for the polite compliment.

LARRY..... hhhhmmmm... trying to figure out how to treat your comment. Why? Because I know you know what you are doing.... but because I think you are forgetting one huge part of what I mentioned in my post. Goals.... asking the client how long that they are going to be in the house.... understanding that the average person lives in their house for over 6 years. Understanding the market... meaning, if rates were in the 7's or 8's, that I would hardly advise points no matter what. Especially since we know the cycles in the last 10 to 12 years. And understanding why most people refinance... to either lower their rate or to pull cash out, right? In the last 5 years, house values doubled, giving people plenty of equity to cash out on. And I will get to that later, in regards to your comment.

If you click onto this link.... I am saving thousands of dollars and you aren't since it doesn't sound like you clicked above... but I show that in this scenario, that it takes less than 3 years to recoup the points.

Overall.... even though you say that the national average is that the average mortgage is held for barely 3 years, those are misleading stats. Look at the last 5 years... with so many people being put into the pay option arm, and once they found out what they got, many refinanced out of it. What about so many that were put into 2/28 or 3/37 arms? Again, more refinancing that has made those stats very misleading. And something else, depending on the market and what rates might have been, and being at one end of the curve,... having a great idea that rates could be lower in a year, why do points.

So.... with rates where they are now and if you know you are going to be in the house for over 5 years, why wouldn't you get your clients to pay rates now. Rates will be going up in the next year, now down.

In regards to the national average...remember the equity statement? Why do you think so many refinanced in the last 3 years? To pull out equity. that is one stat that I do not pay attention to. You need to understand why that stat is so low... not every stat is real nor does it hold true value. Just my .02.

MAY

2008

Thanks for the educational post - have a great Memorial Day weekend!

MAY

2008

I get this so many times it has become a part of my loan proposals now to show the difference and paying points isn't always a bad thing.

JUN

2008

Jeff,

I always say that I can structure this anyway you want, but I think the most beneficial long term is to pay 1 point. Then going into the details and compare the no point and 1 point difference gives the client an idea of what they should do.

JUN

2008

Many of the lenders that advertise No Closing, actually charge more in premium that brokers charge in points. Really, how can they advertise no closing when they really mean closing costs finance with the interest rate?

If I were a regulator I would require those advertising no closing costs to charge no closing costs.

I love the RSS feed trick. Any chance you can give some hints on how that is done.

Richard

AMY.... my pleasure..... hope you had a good one...

NAOMA..... well, I don't always show this. It depends on the money that we have to work with. Sometimes I have no choice but to do a true zero point loan with lending costs.

CASEY..... well, 2 points can be just as good, depending on how long you are planning on staying in the house. Also...depending if the seller can pick it up... and if you do the numbers correctly, even doing 2 points, your break even will normally turn out the same. As long as you have the money... and the best part about this is that you will end up saving more money in the long haul by paying down the rate with more points. And this is not an opinion... it's proven by numbers.

RICHARD..... because they can... it's called advertising... it's not right, and it's basically hard to prove anything. Especially when you can blame it on the market. Meaning, rates can change every day. In regards to being a regulator, it just wouldn't work. And in regards to the link going to my other site, it's very easy. I'll send you an e-mail.... thanks

JUN

2008

Great points (no pun intended) above from all. This is why working well with your realtor can help everyone in the transaction. If a mortgage broker or loan officer can educate the realtors involved whether the buyer and their chosen loan's underwriting guidelines still allow for seller credits specifically for buy-down points, then they are giving welcome aid to a seller who wants to make his home the next "in escrow" listing.

JUN

2008

Like all clients selecting the right loan for your clients is always specific to each person. Not everyone can afford it but some can and could benifit from it. I think that loans have to be customized for each individual based on there current and future financial situation.....

JUN

2008

I agree with this statement. Points are good in some ways, checking the clients goals and finding out what bests suits them. It's just so hard for the client because how do they really know if they are getting a better rate or not. There are lots of Mortgage Brokers out there just hunting for the next buck and will use points and more income. But used correctly--they are great! I love it that Active Rain really talks about common issues!

One should never apologize for getting compensated for the an exceptional job....EVER!....the biggest question one can ask, is did I get the customer the abolute best loan for their needs? Points versus orgination is something when explained correctly is really easy to understand ans sometimes poits is the only way to really make the numbers of the loan work....uncover the needs and customize their mortgage to fit theri needs.

JUN

2008

You have to explain the basic point that is Either the buyer pays the points to you or the bank. If the bank pays you then the interest rate is higher annd also there may be a prepay penalty. When I explain all this to my clienst they prefer to pay me rather than pay the bank.

JUN

2008

Great blog, Jeff. Some entities use the NO POINT phrase as a marketing tool and that has hurt our overall market AND the consumer. People ask for no point loans when it's not in their best interest and its our duty to teach them the reality. Look forward to your next blog.

JUN

2008

From my understanding in the broker world if a broker charges you a point that is not the actual buydown but the commission the broker recieves? (origination points) I agree with alot of the post it normally takes about 4-5yrs to break even if u buy down with points to have a lower interest rate . the problem is how do you know if ur really buying down the rate with discount points vs if your just paying the broker his commission. ? I think that why consumers dont trust lenders because this (buydown process) has been abused so much by the lending industry.

JUN

2008

HAROLD: I'M ATTACHING THIS HUD SETTLEMENT CHARGE STATEMENT:

As you can see from this HUD settlement statement lines 801 and 802, you will be able to break out and see what is the origination fee and what is the discount points...these charges should be disclosed to your client.

Ronda Ching Day (RA)

Realty Executives Oahu, Honolulu, HI

and Mortgage Solicitor with Meridian Financial Network, Honolulu, HI

L. SETTLEMENT CHARGES
700. TOTAL SALES/BROKER'S COMMISSION based on price $ @ %=	PAID FROM BORROWER'S FUNDS AT SETTLEMENT	PAID FROM SELLER'S FUNDS AT SETTLEMENT
Division of Commission (line 700) as follows:
701. $ to
702. $ to
703. Commission paid at Settlement
704.
800. ITEMS PAYABLE IN CONNECTION WITH LOAN
801. Loan Origination Fee %
802. Loan Discount %
803. Appraisal Fee to
804. Credit Report to
805. Lender's Inspection Fee
806. Mortgage Insurance Application Fee to
807. Assumption Fee
808.
809.
810.
811.
900. ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE
901. Interest from to @$ /day
902. Mortgage Insurance Premium for months to
903. Hazard Insurance Premium for years to
904. years to
905.
1000. RESERVES DEPOSITED WITH LENDER
1001. Hazard Insurance months @ $ per month
1002. Mortgage insurance months @ $ per month
1003. City property taxes months @ $ per month
1004. County property taxes months @ $ per month
1005. Annual assessments months @ $ per month
1006. months @ $ per month
1007. months @ $ per month
1008. Aggregate Adjustment months @ $ per month
1100. TITLE CHARGES
1101. Settlement or closing fee to
1102. Abstract or title search to
1103. Title examination to
1104. Title insurance binder to
1105. Document preparation to
1106. Notary fees to
1107. Attorney's fees to
(includes above items numbers; )
1108. Title Insurance to
(includes above items numbers; )
1109. Lender's coverage $
1110. Owner's coverage $
1111.
1112.
1113.
1200. GOVERNMENT RECORDING AND TRANSFER CHARGES
1201. Recording fees: Deed $ ; Mortgage $ ; Releases $
1202. City/county tax/stamps: Deed $ ; Mortgage $
1203. State tax/stamps: Deed $ ; Mortgage $
1204.
1205.
1300. ADDITIONAL SETTLEMENT CHARGES
1301. Survey to
1302. Pest inspection to
1303.
1304.
1305.
1400. TOTAL SETTLEMENT CHARGES (enter on lines 103, Section J and 502, Section K)

	FOIA	Privacy	Web Policies and Important Links	Home
	U.S. Department of Housing and Urban Development 451 7th Street S.W., Washington, DC 20410 Telephone: (202) 708-1112 TTY: (202) 708-1455 Find the address of a HUD office near you

	FOIA	Privacy	Web Policies and Important Links	Home
	U.S. Department of Housing and Urban Development 451 7th Street S.W., Washington, DC 20410 Telephone: (202) 708-1112 TTY: (202) 708-1455 Find the address of a HUD office near you

JUL

2008

Jeff,

My husband, Steve Srein has been in the mortgage industry for over 30 years. He started out with finance companies who loved "no point" loans. They would do them all day, every day. They made the banks rich! It's the old "pay me now, or pay me later" philosophy. If you pay later, you know you are going to pay more. The industry has geared consumers towards "no points". There are some parts of the country where paying a point is standard and other parts where no point loans is almost mandated! Steve has since "seen the light" of his finance company days and went over to the other side to educate consumers. We've been doing this for many years now and it works for us.

Steve has developed his own computerized program that shows our clients the difference in paying points versus not paying points and what happens to their mortgage if they apply more to the principal every month. Yes, we have seen many mortgage brokers AND banks abuse the system, but there are still old timers like us who want to be able to sleep at night and have a clear conscious. It does all boil down to how long will this person reside or invest in this particular home, whether it is a purchase or a refinance. We feel that the way the home is financed is just as important as the investment itself (the home). Once a consumer is educated, we are surprised at how many actually change their mind and decide to "pay now". If done correctly, you will have a happy homeowner who will tell his friends, family and neighbors how pleased he is to have an honest banker. Our goal is to put "People First" (not our wallets) thus our company name. Works for us! It's good to hear from a fellow believer. Thanks for your post and good luck!

JoAnn Srein - People's First Financial Services, Melbourne, FL www.PeopleComeFirst.net

JUL

2008

I created a form that breaks down 4 payment options for my clients so that they can make an educated decision based on the relationship between points, closing costs, and monthly payment.

While my borrowers appreciate the transparency and education, most of them are a little overwhelmed with all of the info. They say, "My last loan officer never showed me this."

So, the challenge is giving a borrower all of the information that they should know without confusing them with the details.

Sometimes I feel like my "Full Disclosure" method actually creates a little skepticism.

Am I being paranoid?

JUL

2008

Hi Jeff:

Love the post, and agree that there is an advantage in having points, but there is also a disadvantage as well. I took your numbers and paying no points is a lot closer in actual cost than paying two points. I looked at it on a 5 Year Amort. Here is what I found:

Zero Points 2 Points

$300k Loan $300K Loan Amount

$92,722.31 Int Paid $83,329.67 Int Paid

$19,574.27 Principle Paid $21,713.44 Principle Paid

Total of $112, 296.58 Total of $105,043.11

Effective Rate 6.375% Plus $6,000 In Points

Effective Payment $1871.61 Grand Total of $111,043.11

Effective Payment $1850.72

Effective Rate 6.27%

The points paid still comes out ahead, but allowing the borrower to see the actual difference in the two is what matters the most. I am like you that we should have full disclosure. I even show them the Yield Spread that is built in the rate and explain to them what that does for them. In 98% of my loans I only collect 1% and any overage is giving back to them as a credit. I get as close to PAR ( 0 YSP) as possible. Call me crazy, but don't think it is right to charge 2 points and have a point built in as a YSP. Just me though.

Keep up the great posts.

I loved your post...and honestly, I have been more of a proponent of no points than paying points (which mostly depended on the client's situation)...but the biggest point you gave, is listening to your client, giving them a little education and giving them options. I think the true test of a mortgage advisor is listening to the client's needs and sometimes letting them know that maybe what they thought they wanted or needed, isn't necessarily the best thing for them.

Keep up the good work...

AUG

2008

Sometimes it is a better use of a clients available funds to apply the money towards other things than paying to lower the rate on a mortgage. For example, it may be more prudent to use the funds to make the next tier of down payment percentage. So instead of paying an origination fee and closing costs, totaling maybe 2.5% of the balance, combining that with an additional 2.5% could move a client to 90% LTV instead of 95%, thus reducing the mortgage insurance cost. Another prudent decision may be to use addtional funds to pay off high interest non-tax advantaged debt to improve the after tax cost of money and cash flow. So, while calculating break-even points, many more things must be considered in addtion to the mortgage alone.

AUG

2008

Another great post

SEP

2008

I agree 100%. It's our job to find out our clients short & long term goals to make sure we're suggesting the best program possible to meet their current needs. Thanks for the great post - I love the breakdown article you included as well.

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