FAQ #7 ......... I Don't Want To Pay Any Points?

By
Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

In my seventh Frequently Asked Questions blog in the ActiveRain contest that Anna 'Banana' Kruchten established in which we are to respond to the 10 most frequently asked questions that we are asked, I will cover a topic that I feel is very misunderstood.  When people hear this word, they automatically begin to have very negative thoughts about it.  While this blog will most likely not change those preceptions, it will hopefully provide some information that may soften some of the feelings surrounding this topic. FAQ #7 is really more of a statement then a question, but it is very appropriate for this contest and series of blogs:

"FAQ #7 ......... I Don't Want To Pay Any Points?"

I don't blame Borrowers for having the negative feelings that they have about Points.  After all they have probably never heard that word use in any way but in a negative way.  In this blog I will not avoid the negative aspects of Points, but I will also show how Points can actually be a very positive thing.

First I will not only address but also reinforce the negative aspects of Points, or as I call them Bad Points.  Bad Points are Points that a Borrower has to pay in the form of a penalty.  Bad Points are charged to a Borrower for various reasons like:

  • Low Credit Scores
  • High Loan To Value (small downpayment)
  • Type Of Property
  • Investment Loan

These are all, but the most common reasons why Points are charged, and they represent an additional one time charge that is added to the Borrowers Closing Costs.  Bad Points are common in Conventional Mortgages (Fannie Mae & Freddie Mac), but they can also be found on Government Loans like FHA, VA, & USDA.  Borrowers are right for having the negative feelings that they have about these Bad Points.  They are not getting anything in return for this additional money that they have to pay.  Bad Points are a penalty that is imposed on the Borrower because they or the property that they are purchasing present a high risk.

But Points can also be Good Points.  For example:

  • A Borrower can pay Points to lower his/her Interest Rate.  These are Good Points, because they lower the Borrowers Interest Rate, and it is the Borrower that chooses to pay these Good Points.  They are being rewarded with a lower Interest Rate for the extra money that they are paying.
  • Good Points can also be received in the form of a credit.  A Borrower can choose to receive a higher Interest Rate, and in return for selecting a higher Interest Rate the Lender gives the Borrower a Credit that is used to reduce the Borrowers Closing Costs.  A Borrower would choose to do this because they do not have enough money for Closing Costs, and the Seller refuses to contribute towards the Borrowers Closing Costs.  Or the Borrower has enough money for Closing Costs, but it will leave them without any money for an emergency, so they would select this option, and get to keep a little bit of their money.

So as you can see Points are not all Bad, in fact they can be very Good if used in a positive way.

 

Previous FAQ's Blogs.

"What Do I Need To Do To Get Pre-Qualified For A Mortgage?"

"What Do You Mean I Need Money For Closing Costs?"

"Why Do I have To Pay For A Full Year Of Homeowners Insurance Up Font When I Am Paying For It Every Month In My Mortgage Payment?"

"How Can I improve My Credit Scores?"

"PMI/MI Why Do I Have To Pay It?"

"At What Point Can I Get Rid Of The PMI Or MI?"

 

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  Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

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 Info about the author:

George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Old Saybrook, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or souto@snet.net

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Joe Jackson 05/23/2012 12:03 AM
  2. Al & Peggy Cunningham, Brokers 05/23/2012 01:22 AM
Topic:
Mortgage / Finance
Location:
Connecticut
Groups:
Realtors®
Mortgages
1st Time Buyers
Real Estate Rookie
ActiveRain Contests
Tags:
points

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Ambassador
848,337
Brenda Mullen
RE/MAX Access - Schertz, TX
Your San Antonio TX Real Estate Agent!!

HI George-Points can be very confusing to buyers and many times can cause them to feel negative about paying for points, but you are right, there are those good kind of points that pay down that interest rate!  Great info George!

May 22, 2012 11:12 AM #2
Rainmaker
877,433
Gail Robinson
William Raveis Real Estate - Southport, CT
CRS, GRI, e-PRO Fairfield County, CT

George - I think you need to change the title.  Should you take out the word "to"?

May 22, 2012 12:27 PM #3
Ambassador
3,490,965
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Jeff thank you

Brenda, it is definitely one of those topic that Buyers automatically have negative thoughts about.

Gail thank you for pointing that out.  I actually forgot to put in the word "Pay".  Now it makes a little more sense :)

May 22, 2012 12:43 PM #4
Rainmaker
279,032
John M. Scott
BRE # 01442690, Scott Keys Properties - San Francisco, CA
Broker / Owner San Francisco Bay Area

Excellent explanation about points George. I hear this subject all the time - buyers need to know the 'why'.

May 22, 2012 01:01 PM #5
Rainmaker
2,139,552
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Well presented and a topic discussed all the time with clients. Most clients really don't understsand the topic at all, so it needs to be constantly explained.

May 22, 2012 08:07 PM #6
Ambassador
2,714,984
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

POINTS may, indeed, be a good thing.

I amortize the cost of the points over the time buyers expect to occupy to determine whether or not they are worth the cose.

"What's the payback on those points."

That is the question.

Or, if the seller is paying them. . . . . . . .

May 22, 2012 10:34 PM #7
Rainmaker
572,396
Mike McCann - Nebraska Farm Land Broker
Mike McCann - Broker, Farmland Broker-Auctioneer Serving Rural Nebraska - Kearney, NE
Farm Land For Sale 308-627-3700 or 800-241-3940

I make a simple graph with two lines intersecting and show them how long it will take to recoup that money and let them decide if it is worth it.

May 22, 2012 11:06 PM #8
Rainmaker
469,950
Tom Burris
NMLS# 335055 - Baton Rouge, LA
Texas/Louisiana Mortgage Pro - 13 YRS Experience

Well, my uncle's cousin said I didn't have to pay points because it is so competitive right now.

 

May 22, 2012 11:10 PM #9
Rainmaker
505,434
Dave Halpern
Keller Williams Realty Louisville East (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

"dont wanna do this, don't wanna do that."

We are only able to help those who are willing to be helped.

May 22, 2012 11:33 PM #10
Rainmaker
592,807
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

It all comes down to education!

Points are like guns, they can be insturments of great good or evil incarnate!

It all comes down to the personal integrity of the consumer's LO.

Bill

May 22, 2012 11:41 PM #11
Rainmaker
2,281,075
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

When first introduced to the points concept, I was turned off..then, when I realized that you can buy down interest rates with them, I took another look...good post and thank you George

May 23, 2012 12:45 AM #12
Rainer
158,194
Anthony Daniels
Coldwell Banker - San Francisco, CA
SF Bay Area REO Specialist

Nickels...dimes.....points.

At the end of the day, somebody is making a very decent profit for themselves.

May 23, 2012 01:23 AM #13
Rainmaker
316,051
Sandy Acevedo
951-290-8588 - Chino Hills, CA
RE/MAX Masters, Inland Empire Homes for Sale

Hi George, great blog and great submission for the contest. The first time buyer would have a lot of questions like this.

May 23, 2012 01:43 AM #14
Rainmaker
1,101,965
Paula McDonald
Magnolia Realty ~ Granbury - Granbury, TX
Magnolia Realty ~ Granbury, TX 936-203-0279

Your posts are excellent and I need to bookmark all of them.  Thank you.

May 23, 2012 03:46 AM #15
Ambassador
2,002,879
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M
George - I think many people don't understand how points work, and this is a simple explanation.
May 23, 2012 04:21 AM #16
Rainmaker
201,775
Dora Griffin
D A Griffin Financial.LLC - Fort Thomas, KY
NMLS 6380

It is great when we get a chance to actually explain something like "points". I had someone today tell me "I don't want PMI".  Sometimes when I hear statements like these I know it is easily resolved with a good discussion of reality, then there are times like the referral I had today where he will try every way to cut his nose off to spite his face. 

May 23, 2012 06:01 AM #17
Rainmaker
825,767
Barbara Altieri
RealtyQuest/Kinard Realty Group, Fairfield and New Haven County CT Real Estate - Shelton, CT
REALTOR-Fairfield County CT Homes/Condos For Sale

George -- Very educational post. If a buyer chooses a higher interest rate in order to get a credit applied toward closing costs, how much does that higher rate generally run?

May 23, 2012 09:12 AM #18
Ambassador
3,490,965
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Barbara, the credit increases every extra .125% increase in the interest rate, but there is not set amount that the increase will be per .125%

May 23, 2012 10:32 AM #19
Ambassador
2,495,469
Ed Silva
RE/MAX Professionals, CT 203-206-0754 - Waterbury, CT
Central CT Real Estate Broker Serving all equally

George, using points to buy down a mortgage interest rate can be a good thing, especially if the buyer intends to keep the home long enough so that the value paid is justified.

May 23, 2012 12:20 PM #20
Rainmaker
801,077
Evelyn Kennedy
Alain Pinel Realtors - Alameda, CA
Alameda, Real Estate, Alameda, CA


George:

I agree all your posts have been very educational.  You explain each topic in a clear and easily understandable manner.  Thanks.

May 23, 2012 02:09 PM #21
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