Rate Fee Explanation
6% 99.00 Costs the loan officer 1 point to choose a rate of 6%
6.25% 99.50 Costs the loan officer 1/2 point to choose a rate of 6.25%
6.375% 100.00 "Par" pricing - the loan officer neither gives nor receives money for this rate
6.5% 100.50 Loan officer receives 1/2 point rebate
6.75% 101.00 Loan officer receives 1 point rebate
If you choose 6%, the loan officer has to pay the bank 1 point for you, and you also have to pay the loan officer. So expect to pay about 2 points for that rate.
If you choose 6.375%, the loan officer receives "par pricing." This means that the loan officer doesn't pay the lender, and the lender doesn't pay the loan officer. So your only charge is the 1 point or so that you pay the loan officer.
If you choose 6.75%, the loan officer receives a rebate from the lender of 1 point. In this case, you will probably get a true "no points" loan.
A "No points, no fees" loan is created when the loan officer receives enough rebate to pay himself as well as all third parties (i.e. title, escrow, appraiser, lender fees, credit report). You don't pay the fees up front. However, you do pay them in the form of a higher rate. If you plan to keep the loan a long time, this choice rarely makes sense.
To determine if a no points and/or no fees loan makes sense, do this simple math:
- Calculate the difference in interest payment for the 2 choices you are analyzing
- Divide the monthly payment savings by the dollar amount of points and fees you pay to get the lower payment
- The result of that calculation is the "Breakeven Point" - that is the number of months you have to keep the loan for paying for the lower rate to make sense
Calculate the interest portion of your monthly payment
For each option
Loan Amount X Interest Rate ÷ 12 = Interest paid monthly
So, for a loan of $350,000 at 6.25% interest, your calculation would be:
$350,000 X 0.0625 ÷ 12 = $1,822.92
The payment at 6% would be:
$350,000 X 0.06 ÷ 12 = $1,750.00
Calculate the "Break Even" point
(In our example, you would pay 1 point if you got 6%,
and pay no points if you chose 6.25%)
1 point = 1% of the loan amount
For our example it is
$350,000 X 0.01 = $3,500
The difference in interest paid for the 2 rates
Larger payment - (minus) smaller payment = Difference in Interest Paid
$1,822.92 - $1,7500.00 = $72.92
$72.92 is the interest you save each month
by paying 1 point up front.
Break Even point
Points paid up front ÷ Amount saved monthly = Break even point (in months)
$3,500 ÷ $72.92 = 48 months