Las Vegas Mortgage Rates - What are Points?
I think it’s important to know what points mean when you’re applying for a mortgage loan. Points are not necessarily evil as many borrowers think. A no fee loan doesn’t always work in your best interest.
Loan Origination Fees: Points
These fees are how your loan consultant gets paid. When the borrower pays all of these fees (points) the rate is lower. The borrower can receive what is called par pricing from the lender (the lender is not paying anything to the loan consultant). Let’s say that par pricing on a 30 year fixed rate loan is 5.5% and that the loan amount is $200,000. If the borrower pays 1 ½ points (loan origination fee) the loan consultant receives $3000 in fees from the borrower.
When the borrower chooses not to pay any points then the loan consultant must look to the lender in order to get paid. The consultant views the lender’s rate sheet and looks at what is called the yield spread premium. This is the lenders term for points paid to the loan consultant. To get 1 ½ points from the lender the rate may be 5.875%, for example, instead of the 5.5%. Hence, if you don’t pay the points the rate on your loan will be higher.
Here is some math on the differences:
- The points cost you $3000.
- You save $576 a year in interest payments with the lower rate.
- It will take 5.2 years in interest payment savings to pay for the $3000 in fees.
- After that you save $576 a year.
So, how long are you going to stay in this house?
If you are only planning on staying in the house for a few years you’re better off with the higher rate and not paying the points.
Keep in mind that you can structure the loan so that you can have a combination where you can pay part and the lender can pay the rest. There are options available to you. I am trying to bring some transparency to the subject. It is also important to talk about locking your loan with your loan consultant. Nothing is set until the loan is locked.
Where do you find the yield spread premium?
Currently only mortgage brokers have to disclose the yield spread premium, and you should find it on your Good Faith Estimate. Banks and mortgage bankers (loan officers who work for the banks) do not have to disclose. I find this rather odd when you look at the mortgage crisis that has been evolving over the last year or so. It doesn’t seem to me that the banks have been providing the best disclosure on some of the products they have brought to the marketplace.
It is important that your loan consultant is a trusted advisor who is working in your best interest. Not all loans are the same; some are more difficult than others. Remember points are percentage fees. A smaller loan amount should have a higher percentage fee than a large loan amount. It is important that the fees are reasonable.
I had a client who was quoted a rate of 7.5% on a 30 year fixed rate mortgage refinance. I reviewed the good faith estimate and the loan officer was making 4 points or $12,000 on a $300,000 refinance. My client had good equity in his home, good income, and excellent credit. I got him a 6% rate on a 30 year fixed rate mortgage and my fee was about $3500.
This post is just about keeping your eyes open and asking some significant questions. We don’t need loan officers like the one mentioned above. Just remember that the banks aren’t required to disclose. Always ask for the APR (annual percentage rate) and compare. Truth-in-Lending (Reg Z) requires this disclosure and it is a good basis for comparing loan programs as long as the terms of the loan are the same. You need to have an apples and apples comparison.
Discount Points:
This is really pretty simple. You can buy your rate down by paying the lender a certain number of points. You may be able to lower your rate by about .25% by paying 1 discount point (it will depend on the loan program that you are choosing). The money doesn’t go to the loan officer it will get you a lower interest rate. Here again you need to do the mathematics and determine if the cost is worth it. How long will you be in the home? If it is only going to be a few years then you’re better off with the higher rate and avoiding the fees.
If you ever have any questions please call me. Mark Clawson 702-351-7912
