Under the Mortgage Microscope: Understanding Points vs. No Points
One of the most common questions that I get as a mortgage broker is, "Can you do a zero point loan?" Of course I can, any broker can do a loan with no points.
The real question is understanding the trade-off between a zero points loan vs a loan where points are paid. (all other things being equal, of course.)
Many "loan shoppers" often focus on this dimension alone and they will run the other way if the lender mentions that a loan has points included. This is short sighted and illustrates a lack of understanding of where the point costs come from, and what benefit (if any) points may have. I am not advocating one way or the other for loans, with or without points, the answer to that question needs to be addressed on a case by case basis. I just want consumers to understand that a zero points loan doesn't necessarily mean they are getting a low cost loan, and they should evaluate all of their loan costs, both with and without points to determine what is best for them.
I recognize a borrowers desire to get a low cost loan. We all want the lowest cost, and best value in anything that we buy. Whether it be our clothes, a car, a house, or in this case a loan. It comes down to doing a cost-benefit analysis that will help borrowers understand what they get for the cost of their points.
Before I explain how to do this analysis, let me be very clear about something. No matter what kind of loan you get, meaning one with points vs one without points. The bank is going to make their profit margin on the loan, - end of story. Pay me now or pay me later, the bank always wins. With that in mind, the borrower has a decision to make. Buy down the interest rate with points or take out a loan with no points.
There are 3 ways you can look at this problem.
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To learn more on how to analyze this problem, you can read the full post here.
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