Understanding Mortgage Points

What Are Mortgage Points?

“Mortgage points”, also known as loan origination points, mortgage loan points or mortgage discount points, are fairly simply to understand. When it comes down to it, a mortgage point is just a fancy way of saying a percentage point of the loan amount.

Essentially, when a mortgage broker or mortgage lender says they’re charging you one point, they simply mean 1% of your loan amount. So if your loan amount is $400,000, one mortgage point would be equal to $4,000. If they charge two points, the cost would be $8,000. And so on.

A mortgage point can vary greatly based on the loan amount, so not all mortgage points are created equal investors.

 

Types of Mortgage Points

A mortgage broker or bank may charge mortgage points simply for doing the loan, known as the loan origination fee. This fee may be in addition to other closing costs, or a lump fee that covers all your closing costs and their commission.

Alternatively, you may be charged mortgage discount points, which are a form of pre-paid interest in exchange for a lower interest rate. These types of mortgage points are tax deductible.

If you aren’t being charged mortgage points (no cost refi), it doesn’t necessarily mean you’re getting a better deal. All it means is that the mortgage broker or lender is charging you on the back-end of the deal. There is no free lunch.

In other words, the lender is paying the broker a certain percent for a rate higher than what the par rate, or market rate would be.

So if your particular loan scenario had a par rate of say 6%, but the mortgage broker could earn two points on the “back” if he/she convinced you to take a rate of 6.75%, that would be the broker’s yield-spread-premium (YSP), or commission.

 

How Loan Brokers Earn Commissions

This is a common way for a broker to earn a commission without charging the borrower directly. However, the borrower still pays the price by taking a higher mortgage rate than necessary, which equates to a lot more interest paid throughout the life of the loan.

If you are interested in exploring the options of private money loans, please give us a call a 707-315-1119 or fill out our contact form or our borrower form and one of trained private money loan specialists will be in touch promptly to answer your questions.

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