Points or "buying down" the rate is becoming more typical than before. Guidelines have constricted and the cost of borrowing money for even the best of customer's has increased.
Typically, one point is equivalent to 1% of the loan amount. Lets exemplify this and we will assume that a borrower is putting 10% down on a $200,000 home. Their credit falls into the average category now for a "conforming" loan with their respective score being a 661. The loan amount proposed then, assuming they are covering their own closing costs is now $180,000. They have a "pricing add-on" of .1% for the loan size (less than $200,000), they have a credit score "pricing add-on" of 1%, and the cost today to break even at par would be at a rate of 6.25% in order to minimize their cost.
180,000 Loan amount @ 6.25% interest/30 years = $1108.29 monthly (before tax and insurance)
As an alternative they could pay an extra point and buy the rate down to 5.875%. They are now at 1% of the loan or $1800 in additional closing costs but the savings far exceed the cost.
180,000 Loan amount @ 5.875% interest/30 years = $1064.77 monthly (before tax and insurance)
People have always assumed the worst and thought of closing costs as the enemy.
The cost of money over time though is your enemy. It will take the borrower 3.45 years to see the cost of that point but if this is the "dream home" that point makes sense. The biggest point here is that as a loan officer you should offer options. It is like you deciding upon sprinkles or no sprinkles on that ice cream cone. Providing guidance and advise to rely on is key in any major financial decision. *IMAGE complements of flickr.com