Yes, let us now enter into the wonderful world of paying points (or not paying points) when getting that loan to buy or refinance a home. Before I go into my piece of advice though, I should explain how I make money as a Mortgage Broker (wait for shameless plug..........) here in beautiful Allentown, Pennsylvania.
On the mortgage side of things, we make our money one of two ways. Wait... I'll reduce this to how Mortgage Brokers make their money. I'll let Mortgage Bankers, Direct Lenders, etc... be transparent about their profit margin (though it is eerily similar;-). As a Mortgage Broker, I make coin by either charging fees on the Good Faith Estimate (Broker Fees, Origination Fees, Processing Fees, and the like) and/or in charging a higher interest rate in which case the lender pays me. The latter is what is known as Yield Spread Premium. Mortgage Brokers disclose it, Bankers don't have too.
Still with me? Let's say my company wants to average 2% on every transaction we close. I can charge you a 1% origination fee on the Good Faith Estimate and bump up the interest rate a smidgen so the lender pays me 1% on the back end. Or, I can charge you 2% origination on the Good Faith Estimate and give you what is known as the par rate (which is simply the very lowest wholesale rate you can get without paying discount points directly to the lender to buy it down further.) Let's say that you want one of those "no fee loans"... then I'll simply bump up the interest rate so that the lender pays me the 2%. When you deal with a Mortgage Broker or Lender, everything is negotiable. I've made loans for 1% and some for up to 4%. That depends on a lot of factors, to be discussed at a later date. Do also remember, my time and service are not negotiable.
What does all this mean? Unless we go back to the bartering system (in which case I have a killer set of fine china)... we are all making money in our respective professions. So, now that you get the gist of how we make our money, onto the wonderful world of paying points and whether you should or shouldn't.
Whether you are buying a home or refinancing a home and plan on being in that home for a long time, you are probably better off paying points to get the lowest rate possible. Why? Quite simply, the money you will save with a lower rate will recoup that fee and then some. Plus, you'll be paying a bit more towards your principal balance. Brief example as follows:
- You are taking a loan of $200,000 and you plan on being in that home for at least 10 years. Let's say with no points you can get a rate of 6.25%. But, if you pay 2 points ($4000.00 or 2% of the loan amount) you can obtain a rate of 5.75%.
- On a 30 year fixed mortgage, your principal and interest payment on that loan with a 5.75% rate would be $1167.15. Conversely, your payment with a 6.25% rate would be $1231.43. That's a savings of $64.28 a month. That's a annual savings of $771.36. Well, to recoup the fees you paid to the man or woman behind the mortgage, you'd have to be in that home for at least six years. Make sense?
On the other hand, if you are only going to be in your home for a short time, you may go a different route. Let's say you are buying a home and really only have enough money for the minimal down payment and applicable closing costs. In that case, you may ask your loan officer (until I get a badge, I hate that term) to waive his/her fees on the front end. That will translate into a higher rate. But it will also keep you from dishing out more money at the closing table.
Let's say you want to refinance your home to get some cash-out for home improvements. Perhaps you plan to turn around and sell the home a year or two down the road. In that case, it may also make sense to pay a little bit of a higher rate and reduce fees on the front end so you aren't eating at your equity with those costs.
Again, consult your Mortgage Professional and run the numbers. If you need one and are buying in or refinancing in Pennsylvania (shameless plug ahead.....) I'm your boy man. Situations are different and your loan program should reflect what makes the most sense for you. This is truly a case by case basis. What makes sense for Uncle Henry or Neighbor Jane, may have nothing to do with what makes sense for you.
I've outlined some brief examples of where paying points may make sense and other situations where... well, not so much. Understanding how we make our money is important. Understanding how to make the best use of yours is even more vital.
Jason,
Pretty straight-foward and to the point ! Spells it out quite clearly. There always seems to be some sort of debate about mortgage closing costs and so forth. It is funny though how some mortgage brokers might bait and switch someone either by offering a lower rate (but having higher fees) or having basically no fees (but a higher rate). Is all good !
These are all very good points (pun intended). The world of mortgages is terribly confusing especially when there are so many different options for rates, fees and services.
Jason, points? Ahhhhh! Points! I thought for just a split second that this was one more tiresome post about Active Rain points! Thank god it's mortgage points, or as Roseanne Rosannadana would say, "Oh. That's different!"
Jason - For the next refinance on my home I would like to offer you the trademark secret on how to add a beautiful shiny SUBSCRIBE to ME Button on your blog. I just love bartering. This should be worth at least a point...correct???
Jason,
Thanks for removing so much of the mystery--I learned a couple of things.
points and more points, when that discussion comes up most of John Q Consumer, well their eyes roll back int heir heads. Unfortunately most consumers don't understand and they are looking for lowest cost either in rate or fees.
Wouldn't it be easier if we could just charge a flat rate of say 6 or 7% regardless of whether we gave you the best interest rate, best service, or actually did anything worthwhile? (Just kidding everybody).
Michelle
Jason - lol...Last time I try and read posts while I'm talking on the phone for a minute I thought you were writing about paying for active rain points!
Hi Jason, I think you make a very valid point and are communicating it to the public the time when it is good to pay points (long term ownership) or not good (living there a short time). Of course, no one has a crystal ball. I have seen people in and out of houses in 6 months and others with 5 year ARMs stay 20 years. Go figure.
Very nice Jason. Good information for home buyers and agents with little experience too. We agents may not make the loans, but you'd better bet your boots we get the questions.
Very nice Jason. Good information for home buyers and agents with little experience too. We agents may not make the loans, but you'd better bet your boots we get the questions.
You have no idea how much I appreciate this kind of discussion from a mortgage broker. It makes a big difference in helping people to understand why a certain course of action may be recommended. I'm bookmarking this post. We all have clients who are shopping around for the best rates and don't understand that the criteria they need to consider is broader and more nuanced. Thanks for writing a clear, concise explanation of different options. BTW...I like the new button/link at the bottom of the post. How did you do that?
Jason... as many have said, well said here. I personally don't care telling people how we make our money. Remember my post about the best rate and wanting great service? But in regards to what you talked about, paying points or not paying points? It's called educating the consumer. I have written about 3 posts on this same kind of information. Some of the comments were scary. When they start talking about the interest write-off, which is a good point. But as I have said, each client is different from the next. good post
Christopher and Stephanie- Ahhh, the old bait and switch game. That is never a good practice, though it seems to be how some folks in many industries operate. That, my friends, is a shame. I think the soul in me would rather be dining on spam and neighboring beside a rat in a gutter rather than play a part in that game.
Beth - Remember when I first started? I didn't even know what a mortgage was! Education, transparency, & integrity will do wonders for an industry. The trouble is, they don't often reap the short-term benefits some professionals seek.
Patricia- Ugh, I know what you mean. In hindsight, I didn't even consciously write this post in consideration for all the posts on here about points. I'm about to sell my AR points on ebay. Everyone starts at zero, I did so twice:-)
Bill - And while you are at it, why don't you paint my house pink, put me in a padded room and make me watch re-runs of Dawson's Creek. That should do the trick... and it's worth about 1.5 points:-)
Cynthia - I'm glad you got something out of this, thank you.
Joe - Yup. It sounds simplistic but I've said it time and again to folks, "Asking for the lowest rate and no fees just doesn't happen. People are making their money somewhere, and they should be. The only free loan is a grant. And even that has strings most times."
Michelle - That would be wonderful! We could open up an innovative brand and branch of lending called, "Fixed Rate & Fee Mortgage" or "FRFM Financial". All loan officers would have to work 10 hours a week and be required to return phone calls and emails within 96 hours. Grab a commercial spot on a television and we are in like sin. I caught the sarcasm right away:-)
Sandra- Somehow I knew you didn't pay attention to the context of my posts, lol.
Gary - Good point, my friend. Sometimes things don't work out as planned, often times actually. That's why it is vital to realize it is a situation by situation basis and this post is just a mere starting point to give people a working idea on how the game is played.
Lenn- Thank you. And of course you get the questions, rightfully so. People just don't seem to realize that we all have our areas of expertise. Loan officers have to help educator the agents and vice versa. In turn, we ALL have to educate the very public we work for.
Lola - As far as the button, that's no button;-) Actually, the ever-talented Mike Mueller helped me with that button. Well, he didn't even help... it was all him. Thank you for your kind words. You don't want my fine china, do you?
Jeff - You snuck in there. I tried to keep this simple, I'll write my dissertation on the Mortgage Industry & all the nuances at a later date... I didn't want to go Ben Stein on anybody just yet. Thanks amigo.
Hey I pay attention! Just not when I'm on the phone. I even read your silly tags. : -)
@ Bill... Too late my friend - he already has the shirt :)
And to My Jason... What a clever little discussion about the points that actually MATTER in this industry :) If I read another whiny post about AR points I'm going to scream. Or pour another drink - which sounds very refreshing about now. Honestly, you made this clear and easy to digest for the average buyer who has no idea how powerful the tool of paying (or not paying) points can be to a their long term financial picture.
Now do I get points for kissing up??
Jason, it is honesty like you have shown that is admirable to both clients and agents. Great post that is to the point.
Sandra - Sardi Rule #5, don't read my posts when on the phone;-)
Jennifer - "What a clever little discussion about the points that actually MATTER in this industry :)" That is an absolutely astute point, my dear. As far as getting points for kissing up, how does this grab ya....
Tim and Pam - Thank you, I tried to keep it simple and concise. Which happen to be two things that aren't always my forte:-)
You just wait.,...
Jason - You have rules? Who would have thunk it.
Hi My Jen
Jason- I like your moving button!
Jason,
Great job in explaining in understandable terms the ins and outs of the monetary aspects of a mortgage...and BTW, would you rather we refer to you as The Loan Arranger??? Thanks, Fran
Jennifer - Be nice and gentle;-)
Sandra - Oh, I have rules. I really do look forward to getting together with you and Dan this Friday. We will discuss rules 1-4;-)
Katerina - LMAO. Touche... click on mine and my post disappears;-)
Fran - 'The Loan Arranger' would work. Should I wear a mask?
Behold a Pale Horse...
Wow, a post about "points" that really has something to do with REAL ESTATE! Well done, Jason! This should be helpful for a LOT of people.
Now I see that others have beat me to my "point" about "points" but oh well..I never claimed to be 100% original! LOL
Great post, Jason. I think it makes sense that if I expect to make a living, I'd want anyone working with me to make a living too. After all, you do have to eat. :-)
Jason, I always wondered what the yield spread premium was? I am so excited that you explained it in English where the masses can understand.
Jason way to go and to lay it on the line. Tell the people the truth and they will trust you
Bro,
It's nice to see AR feature someone else other than RE agents. Refreshing to see a real post about mortgages.
Sardi - This is about as straightforward as it gets. I explain this stuff to my clients all the time. VERY rarely do any of them understand how mortgage pros get paid. This is a terrific post for educating consumers, and I may need to print it out and hand it to buyers.
Karen - Imagine that. What boggles me is I didn't plan this one, I don't plan anything.
Jackie - Rice and beans do the job. If you can't afford beans, pasta typically does the trick.
Audrey - Let's hope they do. There is a misconception going around that isn't exactly accurate. Actually, it is nowhere near. I'll put it this way... as a Mortgage Guy I'm not the best or the brightest. I plan on being that very soon, though.
Russ - Let's call a spade a spade. Folks don't want to hear the truth, they want to hear something that benefits them more.
Bloom - Agreed, I just wish it wasn't me. I think you understand.
Crouch - Thank you, sir. My tendons are shrinking. my soul is thinking. I take heed in my heart.
Thanks for the post Jason, my client came to me today with the same senario... numbers and % rates exactly the same. Did you write this for me? How did you know? Thanks for the clarification.
oops...Thanks for the post Jason, my client came to me today with the same senario... numbers and % rates exactly the same. Did you write this for me? How did you know? Thanks for the clarification.
In our area it is not uncommon for a 1% origination fee.. of course there are no origination loans too... Of course onecan look at the yeild spreed and see the lender is making a good share
Thanks Jason for the very understandable explanation of mortgage fees. Every client has a different situation.
This was so well written I actually learned more! At first I thought it was going to be yet another post on the point system on AR lol!
Thank goodness they have you on that side of the nation giving valid facts and advice. I sure could use you over here ..... :)
I love how you break this down - it is one of the most common asked questions for me when it comes to lending
Hi Jason, with all the discussion here on AR points this week, I thought it was another one, and almost skipped it. LOL This is a great topic and it all comes down to the consumer and what is best for them, the time frame in their home etc... As a Realtor, most people think they will be there forever, then life happens, a new job, promotion, new baby and they move sooner than they think.
Tara - I'm glad this proved so timely. I wrote this for folks just like you:-)
Roland - Folks are making their money somewhere, I'm just pointing out where.
Wayne - That is a fact, sir. That's a fact.
Sis - Who knows, maybe I'll be lending down that way someday. Thank you:-)
Thesa - You're right. It is a very common question. I tried to give a very common approach to a answer.
Missy - Lol, you aren't alone in thinking this was about that other 'infamous' subject. I really wish this topic was written about more by a variety of lending folks. I really think it would prove very beneficial to Realtors and Consumers.
Well done Mr. Sardi. I'll have your badge on your desk in the AM! It's important for consumers to remember that be it a Broker (who has to disclose YSP) or a Banker (who doesn't disclose YSP) that they are in fact comparing apples to apples when looking at GFE's. In fact, when explaining this process, including how loan arrangers get paid, also in the equation must be the difference between retail and wholesale pricing. "FLEX" was an important part of my compensation with 2 of the largest lenders in the country. That "FLEX" was against a retail price, so opportunities were few and far between. That was due to a correspondent lender, right across the street from me beating the pants of me with my own banks wholesale rates. Back then that just didn't seem fair. It still doesn't.
Sardi- Thank you for finally talking about a type of points that actually matters! Excellent article!
Just saw this was featured... as it should be! Some days I could swear you're full of something else, but it turns out you're actually full of pretty yellow stars. You are MY star!
MWA!
Jason, I like the way you operate! This is a great and concise post that could read to any client to bring them up to speed You are a great resource in your area. I am extremely fortunate in Austin to have a couple of very good (albeit not nearly as interesting as you) lenders that I regularly send business. In Texas we are encouraged to NOT help select a lender but I always preface my recomendations with "It's easier to get a mortgage license in Texas than a fising license and that never fails to get my clients attention.
Reading through the comments I am glad to see the points controversy still bubbles with even more people whining about actually mentioning the subject...I wrote a short post that discussed the subject and ofered questions and had a bunh of responses. Oh and what are Bonus points?
Rock on my friend!
Jason, great topic to tackle. And you said it great.
Mr. Geary - Well, it's 2:53 E.S.T, do you know where my badge is? I sure as heck don't;-) As far as the rest of your comment, couldn't of said it better myself.
Blanton - I kind of liked your particular article on points:-)
Jennifer - LOL. I'm something, aren't I? FWA!
Russell - Your line in regards to Mortgage Licensing vs. Fishing Licensing in Texas is classic! No wonder it catches the attention of your clients. Bonus points, that's a whole another matter. I'd give you 50 points for that comment though;-)
Danny - Thank you. I think we should all tackle these type of topics so that consumer is chalk full of education and awareness. Frankly, it avoids problems and makes our job easier.
Bro, very good explanation, but since I am in the business strictly as a hobby, I never charge anything and pay all of the closing costs myself while giving the borrower the lowest bought down rate available....Oh, I forgot, that was when I worked for Fantasy Mortgage. They went down in the mortgage melt down. Surprises me how many people still want that Fantasy Mortgage though.
Great information for home buyers Jason. I think the more we can educate people the better off we all are.
Fred - Fantasy Mortgage, eh? Want to open a company:-)
JL - Yes, education will make their lives and our jobs easier.
Hi Jason - Excellent work in putting this together. It really is a very simple concept that a lot of people find difficult. SInce most people move in 7 years or less not paying the points seem to make sense most of the time.
Bill - You are probably right, but we've (the consumer culture) become so rate sensitive and spoiled that often times isn't the choice made... even if it makes the most sense.
I have been in the business a long time, and think I know mortgages well. However, everytime I see a closing statement , it still is a little confusing, thanks for clarifying
James - Glad that this could be of some benefit to you. Have a good week.
Thanks Jason, I love the way you offer such a clear explanation. Tis is so hard for some buyers to understand.
Janna - It certainly is. While I realize that the word 'transparency' is thrown around quite often these days, I'm a firm believer in it... it's right for the consumer AND our industry.