Points, a sensitive subject

And what about points? There are many ways your bank can make money on your loan, and points is just one of the ways. They may sell the loan and retain servicing so they have some steady income from your loan payments. Some may take a large grouping of like loans, package them together, and sell them as a type of derivative product. Lenders make money off the interest and fee's paid to them over the life of the loan.

Now let's go to the hardest part of the mortgage proposal to swallow, for both the lenders and their clients. I cannot begin to tell you how many people I talked to who, in the first three minutes of our initial conversation, made it clear to me they would not pay any points, no matter what. Nobody likes to start the loan process swimming against the no points current.

So what is the right answer; pay points or not? There is no flat out right answer and on one can tell you it's better to pay the points or stick to your guns and refuse to pay them. And that is of course what we mean when we are buying down the rate. When you look at a lenders rate sheet, which you will not be allowed to see, there is a start rate, with no points, and at a rate you probably not want to accept unless you have sterling credit. Now to get that zero points rate down to something you can live with, like six and a quarter, you may have to pay three points to get it. If you have a half a million dollar loan which is common for the San Francisco Bay Area, you are going to have to pay fifteen thousand dollars, either at close or increase your loan amount by that much to cover the points. So how do you know if you should be paying points or not? This is where that mortgage calculator comes in. A simple calculation is all that is necessary to see if paying points makes financial sense.

Lets take that half a million dollar loan and crunch the numbers. The principal and interest payment on a loan that size at five and a half percent for thirty years is $2,838.95 a month.

Now lets take that same loan, pay three points that we are going to wrap into the loan, and see what our new payment would be. We will have to increase the loan size of course, so we are using a loan amount of five hundred fifteen thousand, rather than five hundred thousand. Now our new loan will be calculated at a new rate of four percent, a full one and a half lower than the zero points loan. The new principal and interest payment over the same thirty year term comes out to $2,458.69 a month. Thats a difference of $380.26, or a savings of $136,893.60 over the life of the loan. Now it will take about three and a half years to make that money back that you paid in points, so if you think you will move or sell the house before that time period then you may want to look harder at a zero points loan, or maybe, just less points. Either way, why not ask your broker, or loan officer to run the numbers, and maybe use your own calculator and follow his calculations so you can see this in black and white.

So, I hope I have shed some light on the whole subject of points. One thing you should always remember. Any points that you do not pay with cash at closing are added into the loan amount and effect your monthly loan payment. Discount points are tax deductible as well, but there are rules to that so I would consult a tax professional before putting them in on my tax return.

Because points increase the size of your loan, it increases the commission paid to your loan officer or broker. Make sure that when your mortgage person suggests paying points it makes sense to your pocket book and not just your loan officers. Some loan officers get paid on loan size as well as part of the points you pay. That is called overage. Basically overage is points that are above and beyond the points for a given rate as stated on the lenders rate sheet. Now, in case that was a clear as mud let me try and simplify.

When I look at ABC Mortgage's rate sheet, I see that my borrower qualifies for a five and a half percent on a thirty year fixed rate mortgage. I also see that to get that rate one must pay two points. Now if I am the loan officer and I can get you to pay a half point above the listed rate on the sheet I may get all or part of that point. This used to be very common as it adds thousands of dollars to the commission your broker of loan officer receives. I believe that practice has been eliminated since the bottom fell out of the mortgage market.

Remember, just because your Mortgage Consultant, or broker suggests you pay points, it does not mean he is thinking purely of his commissions. Hopefully he is thinking about your loan and giving you the best deal available. Some people will tell you never to pay more than two points, and I still maintain that you can not make a blanket statement like that without doing the calculation I mentioned above. I have had clients who pain no origination fee and no points, and at the same time I have asked borrowers to pay three points. You just have to crunch the numbers so you can see in black and white, what makes the best financial sense for you. Everyone's situation is different so don't just listen to the plumber next door, do the leg work and find out for yourself.