Mortgage Points
“Mortgage points”, also known as mortgage loan points or mortgage discount points are fairly simply to understand. A point is a fancy way of saying a percentage point of the loan amount, and is also what makes up the origination fee. So basically when a broker or a lender says they are charging you 1 point, they simply mean 1% of your loan amount. So if your loan amount is $400,000, they’ll be charging $4,000. If they charge 2 points, it’ll be a cost of $8,000. And so on.
If you aren’t being charged points (no cost refi), it doesn’t necessarily mean you’re getting a better deal. All it means is that the broker or lender is charging you on the back-end of the deal. This means the lender is paying the broker a certain percent for a rate higher than what the par rate would be. So if your particular loan scenario had a par rate of say 6%, but the broker could earn 1% if he sold you a rate of 6.5%, than that would be the broker’s yield-spread-premium, or YSP. This is a way for a broker to earn a commission without charging the borrower directly. However, the borrower still pays the price by taking a higher rate than necessary.
Beware that brokers may tell you to pay a point upfront to get a better overall rate, or even a par rate. But you could end up getting charged 1 point in the front, and 1 point in the back. Some brokers are honest, but either way you’ll be able to review the charges at the time of signing by reviewing the HUD-1.
This is a summary of all fees, and the front-end fees will show up as an origination fee, whereas the back-end fees will show up as yield-spread-premium. You’ll be able to see exactly what the broker is charging you, and argue accordingly. But keep in mind that retail banks and lenders can avoid showing you the YSP because they sell their loans on the secondary market, and the YSP may not yet be known, so it needn’t be disclosed.
