“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.
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.
Clearly a mortgage point can vary greatly based on the loan amount, so not all mortgage points are created equal people.
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.
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.
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.
You Might Be Paying Mortgage Points Twice
Beware that banks and brokers may tell you to pay a mortgage point upfront to get a better overall mortgage rate, but you could wind up getting charged a point in the front and a point (or two) in the back. Some brokers are honest, some are not. So take notice!
Either way, you’ll be able to review the charges at the time of signing by reviewing the HUD-1 settlement statement, though usually that’s too late in the game to make changes.
The HUD-1 is a summary of all fees, and the front-end mortgage points will show up as an origination fee or discount fees, 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, though they may list the YSP under names such as “par-plus pricing”or “service release fee,” so read carefully.
Keep in mind that retail banks and lenders can avoid showing you the “service release premium” (their form of YSP) entirely because they sell their loans on the secondary market, and the SRP may not yet be known, so it needn’t be disclosed. This is their competitive advantage over brokers.
Either way, be sure to compare the cost of the loan with and without mortgage points included. Not every bank and broker charges mortgage points, so if you take the time to shop around, you may be able to avoid mortgage points entirely while securing the lowest mortgage rate possible.
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