How do "points" effect mortgage rates?

Answer 1

Lenders price their loans to be competetive in their markets. A "par" rate is where the borrower is able to lock that interest rate for a given period of time without payijng points to buy the rate down or taking a higher rate and applying the investor rebate to their closing costs.

Each point is the equivilent of 1% of the borrower's loan amount. It will usually cost the borrower between .125% and .375% in points to buy the rate down by .25%. This may make sense, in some cases, if the borrower will recover the cost of the buy down in payment svings in a reasonable amount of time. Likewise, a borrower who is short of funds to close may benefit by accepting a higher rate and aplying the investor rebaate to closing costs. The trick is to work with a lender who will disclose any rebate to you rather than pocket it as profit.

Answer 2

Points do not effect mortgage rates. It's more like in reverse.
You can buy down (lower) a mortgage rate buy paying points. 1 point is equal to 1% of the amount borrowed. Points are tax deductible in the year they are paid.
In general, Conventional Mortgage rates are determined by the Bond Markets. Not, necessarily the Federal Reserve, although they greatly influence those rates.

Answer 3

There are two kinds of points: origination and discount.

Origination is paid to the company that does your paperwork. It's a fee. It can be excessive, and it can be zero.

Discount is a fee that the lender charges in order to offer you a better rate than you would otherwise be able to obtain. There is such a thing as negative discount, aka Yield Spread, that the lender pays the broker to get you to agree to a higher rate. Some of this yield spread can be used to offset origination and other closing costs.

There is always a trade off between rate and cost. Judge loans based upon the net terms to you - not who has to disclose how much compensation they make. If someone offers you a loan at 6.25 percent 30 year fixed with zero points and $3400 total closing costs including all third party fees, that is a better loan than a 6.5% thirty year fixed rate loan that costs you half a point and $4000 in other closing costs - even if the broker in the first instance has to tell you they;re making 1% of the loan amount in yield spread, while the lender in the second instance doesn't have to say a thing.

Answer 4

Points effect your mortgage rate in several ways. It really depends on what your goals are. If you plan on staying in your home for 5 years or longer it would be better to pay the closing points up front because you save money in the long run. If you are only planning on staying in the home for a few years you are better off getting a slightly higher rate and keeping your closing down to a minimum. Because there is so much emphasis on no cost loans or no point loans many people choose a higher rate over paying points of pocket. You need to sit down with a mortgage advisor to really show you the difference in savings combined with a good solid strategy for your overall short & long term goals. Hope this helps!

Answer 5

"Points" is another word for "profit"

I am a mortgage broker... If I charge you a 1% broker fee, and no other fees, I charged you a, or 1 point.

The way points effect rates is when they are made on the back end of the loan, on the rate. The bank approves your loan at a "Par Rate" of 6%, but they will pay me 1% or a point if I get you to sign at 6.675. If I close your loan at 6.675, I made a point on the front (which didn't effect your rate) and a point on the back (which DID effect your rate).

Thats why I tend to charge all of my fees on the front of the loan, so I can get the best rates for my clients. That little change in rate, over a 30 year loan is equal to THOUSANDS more in interest paid.

Hope that helps.

Answer 6

Points have nothing to do with mortgage rates. Points are the acquisition fee you pay to the company making the loan. Most mortgage companies have dropped points if your credit is good.

Answer 7

"Points" lower your interest rate. Plain and simple. It doesn't matter about charging costs up front. Closing costs are closing costs an is the cost of doing business. Some lenders costs are lower than others.

"Points" essentially is pre-paid interest. I as a lender am going to charge you 6.25% for 30 years with no points. But, you want 6%. In giving up that .25% for the next 30 years, I am going to ask that you pay me 1% of the loan amount now in exchange for me collecting less interest over the next 30 years. This is a main reason why points are tax deductible and closing costs are not.

It's a little more complicated than this obviously, because Interest rates have prices tied to them on the secondary market, etc.

Visit http://mortgagecounselor.blogspot.com or my site http://www.johnleblanconline.com for more info on this topic and the mortgage process in general. Arm yourself with the knowledge and you will have nothing to worry about when you are signing your closing docs.

Answer 8

Points do NOT necessarily equal additional profits.

If you look at most bank websites, you'll see their "rate of the day". Like Wells Fargo, for example, is offering 6.25% for a 30 year fixed-rate loan today.

Then you gotta find the link to the "assumptions". Meaning, what loan size, loan-to-value, and upfront fees.

In their case, they have the following: All rate quotes shown come with one point as an origination fee.

So that's their baseline pricing for that day. 6.25% with 1% origination fee/point (all the same, ultimately).

Paying 1 additional point on a fixed-rate loan will usually allow you to save about .375% in interest. So you'd get a rate of 5.875% today if you paid 2 points total. It's not exactly .375% every day, but usually that's about right. Those spreads are determined by market conditions.

So, just right out of the gate, you'd need to stay in that loan for about 3 years to recover or break even on that additional point, since .375 x 3 = 1.125%. Only after that time would the point you paid actually begin to save you any money.

The reality is, the average loan is only out for 5-7 years on the high side. 50% are gone in 4 years. People either refinance or sell, though refinancing may be slower than it has in the past 5 years with the way rates have been.

I generally don't advise my clients to pay points, except on rare occasions where there's a weak spot on one of my investors products that we can take advantage of. For example, for a brief period I had an investor that was offering a normal market rate of about 5.5% for a 7-year fixed adjustable rate loan. However, someone in their pricing department screwed something up, and we found that if you paid 1% extra, we could give you 4.00%. You made that point up in about 9 months. And about 11 times over the course of the first 7 years. That, to me, was a point well spent. I managed to get only two clients into that before they fixed their pricing error, but those two clients have saved thousands since. There's been similar discrepancies we've found and exploited before they vanished, but that's very rare. Not my fault if my investor screws up. I just want to find my clients a sweet deal they can't get anywhere else.

Any lender you work with should be very willing to show you, clearly, in writing, what if any benefits you could receive by paying points. It's not hard to break down the cost, break even point, savings over time based on YOUR expectation of time in that home, etc... Meaning, if you told me you're in the home for 7 years, we'd run the numbers off a 7-year timeframe. It's easy to show thousands and thousands of dollars in savings over 30 years. But you'd never see all of those savings. That's why time in the home, based on what my client tells me is their most realistic timeframe, is the key factor in determining whether it makes sense.

Unless there's something weird to exploit though, paying points rarely make sense.

Answer 9

"Points" refer to percentage points. based upon the current lending rate one can buy points ($1,000 to $2,000 average) per point thus reducing the interest rate by 1 percent ie. 7.0% rate, buy down 1 point = 6.0%. Some people that have bad credit are forced to buy points to reduce the interst rate to qualify for a refinance which is then carried on the note.

Answer 10

Simple answer is that points pre-pay interest. In return for getting their cash right away, they can lower the interest rate some.

So for instance, if you pay 1 point, and it lowers your rate 0.25%, than you break even after 4 years.