https://www.youtube.com/watch?v=y4hUIqH0_Wc&list=WL&index=2

Summary:

Understanding Discount Points:

Buyers' Understanding of Points:

Calculating the Break-Even Point:

Lenders' Motivation for Pushing Points:

New Builds and Incentives:

Important Considerations:

Conclusion:

Okay, so today we're going to be talking about mortgage points, why you as a potential home buyer or someone who already owns a home and is thinking of refinancing, need to understand what these are and how they work.

Types of Mortgage Points

Now, first of all, there are two different types of points that a lender can charge. One is called an origination point. What that means is that they're charging you a percentage of the loan in order to be the lender. Sometimes you'll see lenders charge one point origination, which means 1% of the loan amount. So if your loan amount is $200,000, they're charging $2,000 to do your loan. Other times, I see a loan summary where a lender is charging 2 or 3 points in lender origination. That is not normal, okay? I can't stress this enough—that is not normal. So definitely keep an eye out for that.

Typical Lender Fees

Generally, with lenders, you're going to see for their fees they're either going to charge underwriting, processing, a loan origination point, or a lender fee. For instance, where I work at Guaranteed Rate, as I film this, our lender fee is $1640 regardless of what the loan amount is, and that's on all loans except for VA because we waive our lender fee on VA loans. So as a potential buyer or refinancer, the first thing you always want to ask a lender is what are your fees because you want to know if they're going to charge you a mortgage origination point or if it's multiple points or if they have a flat fee.

Understanding Discount Points

Now let's talk about discount points because that's really what you need to pay attention to. Yes, you need to pay attention to lender fees, but discount points are where I see the biggest problem in the industry right now. As I film this, it is May 2024, and I've been seeing this for years, but it's even worse now. I was recently looking at a loan summary sent to me. We're always happy to review your loan summaries, and I asked the buyer. I looked at it and saw $15,000 in points on a $500,000 loan—they were paying 3 discount points for the rate. This is really high because you're paying 3 discount points.

What Are Discount Points?

What are those, right? That's the thing. So what's happening right now is that buyers are not being educated on what points are or how they work and lenders are quoting rate without explaining to you the cost of that rate. So what is a discount point? A discount point is supposed to be a way to buy a below-market rate. So I am making up numbers here, okay? Let's say that the interest rate on a 30-year fixed for your scenario conventional loan is like 6.75% at par. Par means that the lender is not giving you any lender credits, but they're also not charging you any discount points for that rate. Now let's say that you want 6.5% and 6.5% costs one point. So one point is 1% of the loan amount, so if you're doing a $500,000 loan one point is $5,000.

The Real Cost of Discount Points

Now, what a lot of people go is wait how many can I buy? No guys, don't do that, please. So with points, there's always a calculation to make sure a lender doesn't tip over tolerance, but the bigger thing is it's not how many can I buy, how low can I go, it is does the math work, right? And that's what some people are not paying attention to. So one discount point costs 1% of the loan amount.

Now the next question is, well Jen, if I can buy a discount point and I can lower the rate of percent, great, yeah that would be awesome. That's not how it works, okay? Buying one point never equates to a set number, it changes daily. Yes, when I first got into mortgages I had much trouble with this because I was like well wait a second if it's one point why wouldn't that get you down 1% like it did not make sense. But what I'm telling you is that when lenders are looking at rate sheets we have the rates but we also have what's known as the margins, and the margins are where we determine how much we would have to charge to get each rate. Those margins change daily based on investor appetite, the market, what the company feels about a certain rate when they go to sell loans, do they have enough at XYZ rate. There's so much that goes into the margins that it's never consistent.

Points and Market Changes

So if for instance let's say we're on the phone today and you're like okay Jen where would one point get me and I'm like oh okay like it would get you to six and a half today, making up numbers, and you're like great and I'm like okay do you want to lock? No, I don't want to lock. Okay, so you call back the next day and you're like okay where does one point get me today and I'm like 6.625. Wait, what, it was 6 and a half yesterday. It changes with the market, so that's the most important concept to get is that

points change with the market.

So one point is always 1% of the loan amount but how much it buys down the rate is going to change daily. So for instance, when I'm quoting a client I am always trying to do it with no points and the reason I do that is because otherwise, a, it's far too convoluted, b, it's not consistent, c, you're just going to have an upset client because you know the concept that this changes and that one point doesn't have a set percentage it buys down is really frustrating.

Buyers' Understanding of Points

So the big concern beyond that is that what I'm seeing in the industry is buyers don't understand they're being charged points and often they're charged points and it's not really lowering the rate. They may be working with a lender that has really high rates, right? Because remember all lenders do not have the same rates. Not even all lenders at the same company have the same rates. When you're thinking about interest rates, you've got what the company's trying to make, what the lender's trying to make, and then you have what you get from it. So it's important that you recognize well wait a second if I buy two points from XYZ company I may actually get a better rate from ABC company if I bought the same amount of points because it's going to depend on a, what their par rate was, but then b, what their margins look like.

Calculating the Break-Even Point

Yeah, I know you guys are like oh Jennifer this is a tough video. It is, but here's the thing if you're going to be spending you know 1% of the loan amount when the average home in America is over half a million dollars, like yeah you got to learn this stuff because this is a lot of money we're talking about. Now the other thing I see happening is I see loan officers where they will try to sell you as many points as possible. Now as a loan officer do I make more money by selling you points? No, it doesn't affect my pay whether I sell you points or I don't sell you points. My pay is the same, but some lenders really push points and they do it for a multitude of reasons. Number one, if you're buying that rate down they may be able to max qualify you for more. So what that means is that with the lower rate what you qualify to buy could be more.

Lenders' Motivation for Pushing Points

We see a lot of this. Generally, it's not the buyer directing it as much as it may be a real estate agent that says to the loan officer, hey I really need you to get them up to 550 how can we get there and the lender goes oh well if we get the rate to here then we can do this.

Would I personally ever buy three points? No, no, I definitely no. Based on what I see in the rate sheets I don't see a benefit to it. So when I'm looking at points with my clients what I'm doing is I'm making sure the math works. So whenever we're talking about a buy-down, and it doesn't have to be a full point, it may be half a point or a quarter of a point or a point and a half, I'm sketching out hey this is how many months it's going to take in order for this to mathematically make sense. And when I say mathematically make sense, it's basically a gamble.

Long-Term Considerations

It's like this, okay, if you pay XYZ it's going to take two years for this to make sense and what that means is that if you keep the loan for two years and you do not refinance then your money is going to start breaking even after that two years. However, if you refinance before that 2-year period all you've done is light your money on fire. And I go through that, I go through that because I don't want you guys lighting money on fire. So it's something that whenever you're talking about discount points you really want to make sure you're working with a lender who's a, taking the time to tell you, you know, when they're quoting rates, what's the rate with no points, what's the rate with a point, you know, whatever you want. I'm generally going to go no points unless I'm looking at that rate sheet and I see a good opportunity, but you want to be able to have these conversations.

New Builds and Incentives

Also, what we'll see is we'll see like, you know, a new build, right, and on a new build they have this big incentive they're trying to spend so they're buying all these points and with certain loans that doesn't even make sense. Like with VA you can actually use any seller credit to pay down debt within a limit, right, so that would make more sense than buying points, but the lender is just going directly to points because that's all they know. So the key thing about it is this.

  1. Number one, if any lender is charging you points and you're the one that finds it and they never talk to you about it, leave them, okay? We are talking about serious money.
  2. Number two, one point is 1% of the loan amount. How much that buys down your rate changes every single day with the margins.
  3. Three, the math needs to be done. Do the math. You need to see if you're buying down the rate how long it makes sense for that to break even so that you know like okay, do I really think rates aren't going to go down in two years?

The Importance of Math

Sometimes I've done the math for people who have brought loan summaries to us and I'm like this is going to take six years to pay off. Like you know we had one that was really appalling, it was a 30-year loan and it was going to take 35 years to break even, like it made zero sense. And that's the thing is, is that as a buyer, you know, as a potential person refinancing, you're trusting that the lender is going to have your best interest at heart. Not always. I mean look, there's a lot of lenders out there that just want to close you and they know that if they tell you a lower rate you will close and they're hoping that you don't read the fine print or that you don't notice where your money is being spent.

Conclusion

So Eyes Wide Open. If you ever want us to look at a loan summary, I'm happy to. I'm licensed in 48 states, so everywhere but Utah and Rhode Island, I can look at it and be like yeah, this is good or no, it's not. But I cannot stress this enough, if a lender is pushing you to buy a lot of points, you have to ask why. Are their rates high to start off with? Do they need you to buy those points in order to be competitive? Is that the only way you'll qualify because they're maxing you to such a level that you have to buy down the rate? What is really going on? Are they just trying to get an easy sale by baiting you with a low rate? So a lot to consider there. Questions, comments, as always feel free to reach out. Thanks for watching.