What's the Point of Points?

By
Mortgage and Lending with Guaranteed Rate, Marin County, CA NMLS: 22343

What's the Point of Points?

 

Let's get right to the point.  What point?  Points.  I don't get it.  What's your point?  The point is points --- what are they, how do they work and should I pay them when I get a mortgage?  There's a lot of confusion about points and when a borrower researches his or her best mortgage options, inevitably there will be an element of points in the debate.  So in order to help ourselves find the best terms on any home loan, we need to get this point thing under our belt.

 

Point One (One Point)

Simply, one point equals 1 percent of the loan amount.  If you have a $500,000 mortgage, 1% of it is $5000.  Similarly, fractions of a point work the same.  In our example, 1/2 point on $500K is $2500.  If a lender says you can get any certain rate by paying 3/4 of a point, simply take your loan amount and multiply it by .75%.  This rule never changes, despite loan size, type, borrower profile, etc.  One point is one percent of the loan amount.

 

Point Two

Let's put a finer point on points.  We're going to focus on "discount points" and not "origination points."  Discount points are meant to have a direct impact on the rate that the borrower obtains.  "Origination points" are a cost to get the loan itself --- independent of the rate provided.  An important concept to know here is that on any given day, a mortgage lender can offer the public a range of rates.  Let's say a borrower qualifies for a 4.000% rate with "zero points."  This means that without paying any discount cost, the borrower's rate would be 4.000%.  Easy, right?  OK.  So what happens if the borrower wants a rate of 3.75%?  Is that possible?  Yes.  But in order to get the lower rate, the borrower will need to "pay" the lender what it would cost to bring the 3.75% rate to "par," meaning to level equal with the cost of the money at 4.000%.  On the lender side, there is more cost associated with lower rates and an "inverse cost" (aka, lender credit) associated with higher rates.  So on the scale of, say, 3.500% to 4.500%, the lowest rate would have the highest cost to obtain and the highest rate would have the highest "rebate" or lender credit.  Due to regulation, lenders cannot profit any more or less depending on the rate chosen, so the cost or credit to obtain any rate must come from, or go to, the consumer.  

 

Point Three

Does it make sense to pay points when you get a mortgage?  Now I must tell you that as a veteran loan originator, many borrowers pay points to get a "sexy" rate.  Let's say a 4.000% rate is available with zero points, but that a 3.875% rate can be bought for a half point.  Some will make that investment just to have the '3' handle on their "water cooler rate."  OK, fine.  It happens.  But the decision to pay points should always include a math calculation and fortunately, it is a simple one.  Let's use our example again and say that 4.000% is available on a $400K loan at 0 points, or "par."  The payment on this loan would be $1910.  Now let's say this borrower hopes to get a rate of 3.750%.  The lender comes back and says that 3.750% will cost .75% (3/4 of a point) to obtain.  So, we have an investment of $3000 that will be paid at close as discount points, but in return, this borrower will get a 3.750% rate instead of 4.000% for the life of the loan.  The payment savings per month in this case would be $58.  Remember that the borrower is "investing" $3000 at close to get the $58/M savings, so we divide the cost by the savings to determine the number of months it will take to recover the investment.  In this case, it will take 52 months, or a little over four years.  If this borrower plans to be in the home and not replace the mortgage within the that time, the choice to pay points may indeed be a good one.  However, if the borrower does sell or refinance in that initial window, the investment (or part of it) really will not return.  Yes, the borrower got the better cash flow per month, but he/she never realized the true savings the lower rate would provide.

 

The decision to pay points is a personal one.  This is not a "right or wrong" choice and is highly indvidualized to the scenario and the borrower's financial plans and goals.  Helping a buyer or someone looking to refinance understand how points work, and if paying them is worthwhile, is a conversation we are always happy to have.  Call any time if I can be of service!

 

In the right direction, 

 

 

Robert J. Spinosa
Vice President of Mortgage Lending

Guaranteed Rate
NMLS: 22343 
Cell/Text: 415-367-5959 
rob.spinosa@rate.com

 

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960

Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709
 

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate's Human Resources Department.

 

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood ChicagoIL 60613 - (866) 934-7283

close

Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Esperanza Butler® 818 926 5425 06/14/2019 11:42 PM
  2. Karen Rice Madison AL Realtor 06/15/2019 08:46 AM
Topic:
Mortgage / Finance
Location:
California Napa County Napa
Groups:
Realtors®
The Lounge at Active Rain
Mortgage Bankers
Local Expert
Bananatude
Tags:
discount
points
home loan
closing costs
jumbo
real estate
mortgage
origination

Post a Comment
Spam prevention
Spam prevention
Show All Comments
Rainer
180,340
Bob Betel
Allstar Home Mortgage, Inc. - Sweetwater, TN
President, Allstar Home Mortgage, Inc

Great post regarding points. Everyone should have these things explained like this.

Jun 15, 2019 05:19 AM #22
Rainmaker
614,449
Carla Freund
Keller Williams Preferred Realty - Raleigh, NC
Raleigh - Cary Triangle Real Estate 919-602-8489

Very good explanation Robert. Most people only think about what their interest rate is going to be. That's why buyers need a savvy loan officer who will lead them in the right direction.

Jun 15, 2019 05:19 AM #23
Rainmaker
2,434,028
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

Points in the loan world are gravy train to direct lenders and a living to loan officers....The point is...this subject goes back to the bible days called usury where money-lenders were referred to as wicked....Woe unto them? LOL

Jun 15, 2019 05:37 AM #24
Ambassador
1,819,502
Debb Janes EcoBroker and Bernie Stea JD
ViewHomes of Clark County - Nature As Neighbors - Camas, WA
REALTORS® in Clark County, WA

Appreciate this explanation. We have buyers who were curious about this topic. I may refer them to your great explanation. Thank you. D

Jun 15, 2019 06:57 AM #25
Rainmaker
326,643
Karen Rice Madison AL Realtor
Keller Williams Realty Madison - Madison, AL
434-282-7936 Call/Text

Rob Spinosa If someone Googles, "what are mortgage points", I really hope they find your clear and concise explanation.  Thanks for posting.

Jun 15, 2019 08:41 AM #27
Rainmaker
664,875
Laura Filip
Laura Filip Broker , Opening doors for All Seasons of Life - Whitesboro, TX
What can we do for you today?

Rob Spinosa thank you for sharing what points are and what the point of points really are. A good read for sure. 

Jun 15, 2019 08:49 AM #28
Rainmaker
1,066,143
Margaret Goss
Baird & Warner Real Estate - Winnetka, IL
Chicago's North Shore & Winnetka Real Estate

Never fully understood this - there are so many "finer" points to all facets of the mortgage process. Work with a pro!

Jun 15, 2019 09:34 AM #29
Rainer
296,535
AndreaBFerreira CRS - SRS - CLHMS
Keyes Co. - Davie, FL
Miami Dade, Broward and Palm Beach County in FL

It would be wrong to say paying points make sense when the interest rates are very high? Like over 8%-10% because the money will be more expensive? which  is not our market nowadays. Thanks for sharing .. I loved the "sexy" rate term... enjoy your day..

Jun 15, 2019 12:48 PM #30
Rainmaker
81,815
Stacey Mayer
Snohomish-Homes.com - Everett, WA
Snohomish-Homes.com

Thank you for creating an easily understandable explanation of such a little understood, and scarey, part of everyone's mortgage. Information helps to take the fear away! Very appreciated.

Jun 15, 2019 01:13 PM #31
Rainmaker
366,792
Abby Stiller
REMAX Realty Group - Cape Coral, FL
Professional Bilingual Realtor (239) 284-8637

Great post Rob Spinosa I wish all lenders took the time to explain the subject to home buyers. 

Jun 15, 2019 02:22 PM #32
Rainmaker
399,718
Steffy Hristova
HomeSmart Elite Group Tempe AZ Tel: 480-966-9353 - Tempe, AZ
Tempe AZ Realtor - Your Home Close to Your Work!

Rob, thank you very much for this so well-presented explanation on loan points.

Jun 15, 2019 03:00 PM #33
Ambassador
3,800,695
Kathy Streib
Room Service Home Staging - Delray Beach, FL
Home Stager - Palm Beach County,FL -561-914-6224

Hi Rob- another excellent post about points and one that is easily understood!!!

Jun 15, 2019 04:36 PM #34
Rainmaker
301,413
Samantha Smith
214.422.0729 www.SamIAmHouses.com - Rowlett, TX
Sam I Am Houses, Simply Texas Real Estate

GREAT informative post!!! Thanks so much for breaking it down and giving such a thorough explanation!!!

Jun 16, 2019 12:45 PM #35
Rainer
9,210
Denise LeBreux
Re/Max Real Estate Center - North Attleboro, MA
I love working with BUYERS!

Too often a LO will explain points too quickly to fully understand. Thank you for breaking it down so simply!

Jun 17, 2019 06:35 AM #36
Rainmaker
370,861
M.C. Dwyer
Century 21 Showcase REALTORs - Felton, CA
Santa Cruz Mountains Property Specialist

Thank you for an excellent post detailing the finer points about points!

Jun 17, 2019 07:31 AM #37
Rainmaker
249,343
Doug Kaller
Academy Mortgage, Reno, NV - Reno, NV

Paying discount points on your "forever" home would seem to make sense. Too often though, circumstances change. My wife an I just bought our fifth "forever" home. If you know you will be in the home for a long period, points definately make sense and can save you thousands of dollars over the life of your loan. If the size of your family is changing or you job will require you to relocate, points probably aren't a good investment. 

Jun 17, 2019 03:38 PM #38
Rainmaker
2,492,489
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

This is good information about points, Rob!  It is certain to be helpful to those who need to originate a new loan either in purchase or refinance.

Jun 17, 2019 05:27 PM #39
Rainmaker
2,492,489
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

I should also add that I remember days in the 1980s when points fluctuated wildly.  It made nervous wrecks out of many an agent.  We were glad to see it calm down in the 1990s, and since.

Jun 17, 2019 05:29 PM #40
Anonymous
robert hull

Get a quick and urgent loan credit?
Do you need an urgent loan to solve your financial needs?
We offer loan with good conditions
~No collateral required !!!
~No credit checks !!!
~Loan Transfer is within 24 hours !!!

we offer loan to individuals and companies who are looking for urgent loan for personal purposes, business start up, for business expansion, auto loan, student loan and more. we can offer you finance without any delay contact us today. Email us at: hullrobertloanagency@gmail.com

MR. HULL ROBERT
Tel: +1 (812) 221-3888
WhatsApp: +1 (812) 221-3888
Web: http://us-nethullrobertloans.webs.com
Email: hullrobertloanagency@gmail.com

Jun 18, 2019 09:12 AM #41
Anonymous
mike

Are you looking for loan ?? Need a loan in any form and for any reason ?? We are here to help you in the end as we offer reliable lending interest rate of only 3%.
Borrowers interested should contact us now at garrywiltonloan756@gmail.com and get a loan today.
E-mail: garrywiltonloan756@gmail.com
Whatsapp: +19854134402

author Garry Wilton

Jul 13, 2019 07:13 AM #42
Post a Comment
Spam prevention
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainmaker
527,480

Rob Spinosa

Vice President of Mortgage Lending, Marin County
Can I Get a Jumbo Loan with 10% Down?
*
*
*
*
Spam prevention

Additional Information