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Points Explained 

Definition of Points:

Points are pre-paid interest on your loan. If you pay points, the rate for your loan should be lower than if you do not pay points.

The concept of paying or not paying points is often misunderstood. The greatest abuse comes from lenders who claim you are getting a low rate for "no points"; but they charge you thousands of dollars in fees.

Points are tax deductible, fees are not! If you have the choice of paying one over the other, choose points.

Let me make this very simple. Loan officers are paid either by you, the bank, or a combination of the two. This is not rocket science. Just ask your loan officer (banker or broker, it is the same concept for both) to explain clearly the rate and fee options you have.

Below is an example of the pricing on a rate sheet that your loan officer in the bank or your mortgage broker sees:

Rebate Explained

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:

  1. Calculate the difference in interest payment for the 2 choices you are analyzing
  2. Divide the monthly payment savings by the dollar amount of points and fees you pay to get the lower payment
  3. 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

Example:

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

 

 

 

Junk Fees
Protection from Bait & Switch
Points Explained
Risk Assessment Forms
 

http://www.priorityfinancial.net/resources-tools/mortgage-calculator/Calculators