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Discount Points? What’s the Point!!!!!

By
Mortgage and Lending with Florida Energy and Air Services

I became a Mortgage Broker  5 years ago, and one of the myriad things I learned about was discount points.  I asked many questions on many different topics but the one item I always came back to were the Discount Points. 

What are they?  Do you know?  If you are a Realtor have you seen them on a clients HUD? Have you seen them on your own HUD?  If you are a mortgage broker have you used them with your clients?  If so, why?

Ok, first of all let's define discount points - Discount points are meant to buy the rate down on a mortgage, they are paid at closing.  For years this was not the actual case though, they were just another way for mortgage brokers, loan officers and lenders to hide additional fees that they were making on that particular loan.  A few years ago State Governments started to pass laws that if the discount point was not used to actually buy down the rate then it was not legal.  Lenders followed suit.  Discount points can no longer be just another fee on the HUD.  They must be used to buy the rate down.

This brings me to the point of my Blog - Discount Points? What's the Point!!!!!!

As a general rule of thumb Lenders charge one discount point to receive a quarter point reduction in rate.  This can vary day to day depending on the market, in some instances it could be less.  On a $200,000 mortgage paying 2 points to bring the rate down by half a point would cost your client $4000.00.  It can take your client anywhere from 5 to 10 years to break even.  How long will it take your client to break even?  How long does your client plan on staying in their home? Could this money be better used for other purposes?

It is our job to help educate so that we can earn our clients trust and advisement so that they know we truly have their best interests at heart, so that we may create customer's for life.

Ask your clients these very important questions before giving them the option to buy those discount points.

  1. How long do you plan on staying in your Home?
  2. Will your be refinancing in the near term for home improvements?
  3. Do you have high interest credit cards that would benefit from you paying them off now?
  4. Do you plan on making large purchases for your new home, i.e.,  appliances, furniture, would it benefit you to pay cash for these items?
  5. Would you benefit more from placing the money into a CD, mutual fund or IRA?
  6. Have you taken the time to educate your client on Biweekly Payments?  One extra payment a year will knock 9 years off the term and save 1% in their interest rate.
And finally the most important question to ask is of yourself.  What is the net benefit for my client?
Carol Spengel
Prudential Rubloff - Wheaton, IL
Wheaton IL

On one of our properties, we are offering that the seller pays points so the buyer will get a better interest rate.  My seller asked if I think that will help the sale.  I told him if you home is in the top three, it might sway a buyer because their monthly costs would be lower.  In this case, the buyer doesn't have to worry about breaking even since the money is from the seller.  Sherry

Jul 08, 2007 07:26 AM
Marie Wright
Florida Energy and Air Services - Clearwater, FL
Sherry - Kudos, Very creative..I love stuff like that especially in a market like this.  It also helps the prospective buyer open up a good dialogue with his lender on best how to structure his or her financing.  Especially a first time home buyer who doesn't know all the terminology.
Jul 08, 2007 07:34 AM
Tom Burris
NMLS# 335055 - Baton Rouge, LA
Texas/Louisiana Mortgage Pro - 13 YRS Experience

My favorite comment by buyers:

"I don't have to pay discount points because i know they are junk"

When asomeone acts like that, they do themselves a disservice.

 

Jul 08, 2007 07:36 AM
Marie Wright
Florida Energy and Air Services - Clearwater, FL
Exactly Tom,  There is so much misinformation out there.  If a client makes that comment you know they don't really understand the process.  Perfect time to make all of the talking points made in this blog and by Jason and by Sherry.  Then perhaps they can say with confidence whether they want to pay discount points or not.  It is their choice....
Jul 08, 2007 08:25 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Marie...  I can understand most of your point. But while being in the mortgage industry for almost 15 years, I will have to disagree with some of what you mentioned. If you do the math and do it often, the break even point is usually 4 1/2 years. You also need to add the tax benefit into this equation. Sorry, but I just am a stats guy and try to be more precise, especially if we are writing about educating the client. Sure, we aren't talking about being exact, but being in the ballpark is how I try and educate clients. So many give stats that are misleading, but you then get people that comment, that say.... great info... sounds good. I learned a lot. But did they really?  If the info is off and not just by a little. Don't get me wrong, not saying that you are doing this. 

And your definition of discount points?  vs hiding other fees?  Some of this in my opinion is false or misleading. Yes, points can buy down the rate. But so many charge a commitment fee and application fee. But if I put these 2 fees into the discount point section, I am now better than that other lender. Even if the dollar amount to the consumer is exactly the same. They get to write off a certain percentage of this depending if it's a purchase or refinance. So, I am better. Also....  everyone needs to make some sort of profit and if the client wants a lower rate, my profit will be in the discount points at times. Every single person is different, meaning difficulty or loan...service, etc etc. So... points will be different for each person. Just my opinion.

At the same time, while reading this, I almost felt like the lender charging the discount points was making nothing and just buying down the rate. And in all honesty, you have me totally confused about state laws that were passed, stating if my discount points didn't buy down the clients rate, that this was not legal. Not trying to sound rude, but where did I miss this?  What law was this?  Remember, when writing about this, make sure that you state where these laws count, if they do. So many states are different. Now, I know many states passed laws that state that a lender can't make more than a certain percentage, which is to include closing fees, commitment fees, and points. Is this what you meant? 

Overall, you overall point is good. But when I break this down, I find a few things that I disagree about and I think it can be misleading. thanks, jeff

                                                                                                          jeff belonger

Jul 08, 2007 08:28 AM
Marie Wright
Florida Energy and Air Services - Clearwater, FL

Jeff,  My intention was to not be ambiguous.  One state that comes to mind is Texas.  Here in Florida some of the lenders have made it so that if you charge the client discount points you can not make any ysp and it is actually buying down the rate and rightly so if your intention is to really let the client buy down the rate and save monthly.  As for fees being called one thing or another it's almost like going and buying a car isn't it?  and being told you have to pay the delivery fee, assignment fee.  It's all just another name for the same thing.  Clients choose us for many different reasons over someone else. 

My point behind writing this is I currently have a school teacher purchasing a home after her soon to be divorce.  She had gone to her future ex's closing as she was still on the mortgage and had to still sign (It being Florida).  The ex was paying discount points and she wondered if it was a good choice for her.  I explained what the discount points were and I then asked her what was her desired result that she was looking for after hearing the explanation of what the points entailed.  She was imagining this big difference in payment and as it was a small loan amount the difference was not as great.  The point being I gave her all the information, she took notes and we spent about an 1 1/2 hrs discussing her options.  She decided to invest the money elsewhere and choose paying one extra payment at tax time so as to lower her interest rate that way. 

We all reach out to our clients in different ways.  My way is I like to load them up with information I enjoy when they tell me they get what I am saying or that they appreciate that I gave them options. 

I appreciate your comments Jeff, I think we all have something to learn from here that's why we are singing in the rain.....

Jul 08, 2007 08:52 AM
J.R. Quarles
Mortgage Executives LLC - Memphis, TN
The Mortgage Innovator
Great post.... I love the way you broke down the point systems..
Jul 08, 2007 09:17 AM
Marie Wright
Florida Energy and Air Services - Clearwater, FL
J.R.  Glad to see you got it.  I think we have to take baby steps when first explaining new items to our clients.  There is so much information to digest that so much of it gets lost when first being handed over to them.  I think simple questions that make you think of the bigger picture encourage deeper conversations.
Jul 08, 2007 09:28 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Marie...  I am not going to win friends here because I will speak out on blogs. And unfortunately I sometimes don't say it in the best of manners. Maybe that is my passionate side speaking.

But here is my whole point in case. JR says great post. You broke down the points systems well. I think you touched on a good topic. I think you pointed a few good things out. I still disagree on some things and how they were mentioned. I go and read JR's description on his profile and here is what he states....  At TJC Mortgage we guarantee the lowest rate, lowest closing costs and a fast closing.  Sorry, but you just can't guarantee this. We all know this is to get clients to chime in, to call, or to e-mail. But this slightly solidifies my comments in how we need to educate the average consumer and not just talk to them in terms that they want to here. 

So, I question people like JR, if they read this post word for word and truly understand it and not from a realtors perspective. Because realtors sell houses and this post would sound great to them. I still have an issue with how you talk about points.... you make a general statement. People read these from all states. If I write something  that is state specific, I am going to mention this. I guess I am a stickler for this kind of information because in reality, we are misinforming the average client on a national level. If a client that I am dealing with in NJ reads this, that this doesn't pertain to them, they are going to question me to death. The problem with this is that many people, myself included, when not an expert in a certain field, will first believe what I read....until I do research. And if your research isn't backed up by good information, then what you read originally might sound correct and or legit. This is a national problem. Just like when people hear their fathers give them adivce... even if their father was successful, knows a lot, but not everything... they will tend to listen to them first.

I will challenge people.... not trying to say that I know it all. But I still think there are some holes in regards to some statements made both in the post and in some of these comments.  And if we are afraid a post will be too long by giving good detailed information and not bits and pieces, then write a 2 part blog on this stuff.  Get specific. A hole?  How long it takes to recoup points.... 5 to 10 yrs?  And then not talking about the write offs. Lastly....you do bring up some good question, in the 6 that you ask and talk about. But throwing numbers out there....   like I said, I am more of a stats guy and I am not here to pick you or your post apart. But we do need define stuff like this if we are going to talk about it.  thanks

                                                                                                      jeff b

Jul 08, 2007 10:13 AM
Marie Wright
Florida Energy and Air Services - Clearwater, FL

Jeff, I suppose that would be the whole dichotomy of the Blog.  I love that you question the previous post and I do not take offense at all to your dissection of my Blog....I am about the who, what, where and why of what I do.  That is how I feel comfortable being out there in the public eye.  I sell through knowledge I must completely understand the in's and the out's of any particular situation.  I will not win any friend's by saying that too many times people are thrown into the mortgage industry because it is categorized as "sales" and all you need is your personality...And as such they are feeing people to no end.  Because it is all about the end result.  They close a few loans and then move on back to car sales or whatever..Those of us choosing it as a profession are left holding the bag...

Let me ask you this what was the least amount you collected as a fee.  Did you do take the client into account? and think of the bigger picture?  Did you think perhaps if I put the client in the driver's seat it will come back to me?  You talk about the guy in NJ that may read this and perhaps he will give you a hard time about semantics of fees and what you are collecting.  So what? If you desire the business you will work harder and more diligently to earn the business.  That is what seperates the men from the boys...

Of course there are holes in my post.. When you first talk to someone about a particular program do you overload them with information? Or do you stick to the main points and focus on those so as to get a dialogue going... As I said before baby steps.  My process of being a mortgage broker is knowledge that is how I am comfortable being in this industry because that is what I crave, knowledge is KING....  

All I can say is I researched this before posting it and nothing came up in any of the searches related to discount points.  What does that tell you?  Even people in our industry don't know how to address it.  There is no clear cut answer and that was what I was trying to get at.  It is an individual and personal decision whether a client should choose this option or not, we should as responsible professionals ask the questions of our clients that make them come to the final conclusion of whether or not it is in their best interests.

No offense taken, I welcome the questions it opens up dialogue...

Jul 08, 2007 11:48 AM
Robert D. Ashby
Cruise Planners of South Florida - Plantation, FL
Providing Personalized Travel

Marie...Many comments have hit on the areas that you had omitted in the original post.  Namely, there are many advantages of paying discount points and thatthe "recovery" time is less than 4 years, especially when looking at the tax benefits. 

Are they worth it?  Your title says no (by the way, I like the title).  However, the reality is like every other borrower's situation.  It depends!  I do not use that as a "scapegoat" clause, but rather that it is the only way to truly state it.  There are many factors that go into analyzing a borrower's needa and what is their best solution.  So many so that I cannot list them here. 

Your questions at the end are a good start.  Many of the comments add some needed information as well, but more information is still needed to obtain from the client.  I liked the post overall and commend you for laying it out there.  Knowledge is king, as you stated, and I am sure you will be able to expand on this post further in the future.

Jul 08, 2007 02:04 PM
David A. Podgursky PA
THE PODGURSKY GROUP @ Re/Max Direct - Boynton Beach, FL
THE PODGURSKY GROUP - Make the Right Move!

Jeff - I don't agree .... 4.5 years is an extreme and it all depends on what the strategy is.  4.5 years - maybe for 2 points but for one?

Marie - biweekly payments and 1% ... I wouldn't recommend anyone quote that out.. that's a lawsuit waiting to happen. 

Points on a loan are prepaid interest ... there are people that benefit paying it up front.  The problem is just as stated above there are many people who think they are junk fees.  It isn't about creating a fee... it is about showing someone how prepaying some interest will benefit them in the short and long run.

In no way does biweekly payment equal the same as buying a rate down. 

Jul 08, 2007 03:00 PM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

David... do the math on many scenarios.  The average comes out to 4.5 years... 1 pt, 2 pts...  it does depend on what you compare it to....  but not 5 yrs and especially not 10 yrs. And if you put someone even in a scenario like that, you should be shot. You can disagree, but numbers don't lie.

Question... if 4.5 yrs is an extreme, which way is your pointer pointing to?  Less than?  Greater than?

I do agree that you shouldn't be mentioning a 1% difference. As you stated, it's prepaid interest. 

Jul 08, 2007 03:07 PM
Marie Wright
Florida Energy and Air Services - Clearwater, FL

Robert - Yes, I agree there are advantages to paying discount points and I am aware that my post seems as If I am saying no, but I think that has more to do with the personal experiences I have had with my clients, wherein I have had a lot of repeat clients come back and want to refinance again and generally they are for many varied reasons or they are now selling when they stated they would not.

I like the idea that you state that more information needs to be gotten from the client.  Because I believe that ultimately that is the one who must decide if it is something they want.  My intenetion of the post was to open up a means of communication and get the client thinking about their end result. 

Jul 09, 2007 02:15 AM
Marie Wright
Florida Energy and Air Services - Clearwater, FL

David - Thanks for your comments.  First off I am not saying that biweekly is the same as a buy down I am meerly putting it out there as another viable option for the client.  Go to any online Biweekly calculator and you will see that the general years knocked off are 9 years and that it calculates into about 1% difference in interest rate.

And yes the problem is definitely that people think they are junk fees.  I believ it is important that all options be explained and objections overcome.

Jul 09, 2007 02:30 AM
Marie Wright
Florida Energy and Air Services - Clearwater, FL

Jeff - I must disagree with you on the average being 4.5 years.  I believe it all depends on the situation on hand.

For example I have two different refinances where buy downs were done for my clients.  The first buy down was .125% of the rate and they would be at break even by 6 months.  Obviously a good deal for them.

The second buy down was also for .125% but the break even point will work out to 8 years.  Why did they do it?  They came to me with 75% back end ratios. They already had an NOD from 13 months ago and where headed back in that direction.  They were a referral from a bankruptcy attorney that could not help them because of the change in bk laws.  In order to payoff all their debt and get them below 50% back end on a 30 year fixed rate at PAR mind you the rate had to be bought down. 

Okay so Jeff please don't shoot me........

Jul 09, 2007 02:42 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Marie....  sorry, but you totally lost me. The first buy down was .125%?  Do you know how many buy downs are?  You aren't telling me what their original balance is. What their new balance is...  what costs are involved. What their old payment was and what their new payment is. That was half of my point. Making statements with a lot of information missing. Sorry, but to me, this is misleading the consumer. Why?  Because they will read this... HAVE no CLUE... but will read what you wrote, thinking that this or that is good for them. But based on what?  The x factor, X being the unknown. You can't solve for X unless you know what why is. 

Overall, that was half of my so-called dilemma while reading this. As stated, you bring up some good questions. But making statements with no examples, it's too blurry per se. And if you watch my words, I say words like... on the average. My opinion. ... on the average, it will be 4.5 yrs when recouping your costs. NOW... if someone is going to charge higher fees and such, that is different. But I am talking about when comparing your apples to your other apples.   

Lastly,  I am not here to change your mind. You might learn something from it. But I am here to educate the consumer reading this. That more information needs to be supplied. It's like a client telling me that they got a great deal. SO???  Until I see it or until it goes to closing, it's a mute point.

                                                                                                          jeff belonger

 

Jul 09, 2007 02:51 AM
Marie Wright
Florida Energy and Air Services - Clearwater, FL

Jeff, Sorry so vague.

The first one was a loan amount of $124,000 They wanted to keep their interest rate the same as they currently had at 7.25% on a 30 year fixed No Doc.  At that time the rate at par was 7.375% it cost them .051% to buy the rate down to the 7.25% at a cost of $63.24.  The savings monthly was $11.00 hence the break even at 6 months.

The second scenario was the rate at par was 8.125% but it put their back end ratio at 50.532% which the lender did not allow, going full doc with scores below 600 mid.  So on a loan amount of $341,000 it cost them 1% to buy the rate down to 7.95% at an amount of $3410.00. Their back end was now 49.968%.  This saves them $40.00 a month over the 8.125% so it will take them 86 months to break even.

Either case you look at the first the client wanted to buy down, albeit not by much.  The second scenario the client had no choice because of their financial situation.  It was refinance and reduce the overall expenditures or lose the house.

 

Jul 09, 2007 04:23 AM
Olan Carder
Fairway Independent Mortgage - Charlotte, NC

Pretty good overall post, but I still think discount points make sense sometimes.  I know you didn't say they don't but your post definitely is leaning against the points.  Sometimes if a customer is going to be in the home for a while and they only have to pay a fraction of a point to get .125% or .25% better rate it can make sense over time. 

The main thing is to ask the right questions... as you stated at the bottom. 

Jul 09, 2007 11:07 AM
Marie Wright
Florida Energy and Air Services - Clearwater, FL
Thanks Olan,  It is as you said it can make sense in some cases.  It is just really important to find out the motivation of the client.  That's what I was trying to impress upon.
Jul 09, 2007 11:14 AM