“Mortgage points”, also known as origination points, mortgage loan points or mortgage discount points, are fairly simply to understand.
A point is just a fancy way of saying a percentage point of the loan amount. Basically, when a mortgage broker or mortgage lender says they’re charging you one point, they simply mean 1% of your 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.
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.
Alternatively, you may be charged mortgage discount points, which are a form of pre-paid interest in exchange for a lower interest rate. These types of mortgage points are tax deductible.
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 would be. So if your particular loan scenario had a par rate of say 6%, but the broker could earn two points on the back if he/she sold you 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 interest rate than necessary.
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 rate, or even a par rate. But you could end up getting charged a point in the front and a point in the back. Some brokers are honest, some are not.
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.
