Points & Pricing
Interest rates and pricing can be confusing, and difficult to explain, but I’m going to try and break down the different components to make it easier to understand.
Check out this example rate sheet below (also referred to as a rate stack). It’s what a loan officer looks at when determining what interest rate should be used for any given file.
Rate
is the interest rate
Price
is the price of the interest rate; it is calculated from 100. In this example the price for a 4% interest rate loan is 98.050. It is calculated
100-98.050 = 1.95
1.95/100 = .0195
.0195 x $200,000 (loan amount) = $3,900
Total Cost
is the cost for the interest rate
Mortgage Points
also known as discount points, are an upfront payment that reduces the interest rate on a loan.
One point equals one percent of your loan. So, for a $200,000 loan, one point would cost $2,000.
The interest rate cost is the amount it costs for any given interest rate. This depends on the borrower’s financial profile (credit score, LTV), the property use (primary residence, investment property, etc.), and the property type (single family household, condo, etc.).
The difference between points and cost.
For a $200,000 loan, one point would cost $2,000. That one point that the borrower is paying will take the interest rate down based on the lenders available pricing at the time the rate is locked.
"Par Rate"
is the rate at which the borrower does not have to pay any points. On this rate sheet the par rate is 4.875%. The monthly principal and interest at this rate would be $1,058.42. However, for $4,000 (2 discount points), the interest rate goes down to 3.99%, which is a monthly payment of $953.68. This is a monthly savings of $104.74. It would take you just over three years to break even, which might be worth it if you have the money to put down and you plan to be in the house or the loan for a long period of time.
Long Term
From a long-term perspective paying $4,000 up front for
the lower rate could end up saving you $37,705.87 over the life of the loan.
But, if you plan on turning this property into an investment property and/or
refinancing after a year, or just don’t think it’s worth it, you might just
take the higher rate and pay the extra $104.74/mo.
When I price a loan, I look at several factors.
- What can the borrower afford to pay? Depending on DTI, the borrower may need to buy down the rate to be approved.
- What is the cost/benefit to buying points? If there will be no real benefit to adding points to a loan, I won’t. If there is a good deal that will save my clients money, then I will.
- What is important to the borrower? Some borrowers want to pay as little as possible up front, and others want to pay as little interest as possible later. Most homebuyers are somewhere in the middle.
- What can our branch do to help the borrower get a better deal? Often, if possible, our branch will pay part of the cost to keep our rates competitive and get our clients the best deal possible.
One thing that does not factor into the decision is my own compensation. I don’t benefit from any points charged to the borrower. The only thing that benefits me is that the customer is happy, the agents are happy, and the loan closes on time.
Be aware
- When you see rates advertised online, make sure and read the small print. Most of the time rates are advertised for a borrower paying several thousands of dollars worth of points.
- When reviewing a clients quote from a lender, make sure to check how much is being charged for points. It’s not a bad thing that the client is being charged but it is misleading when the charge for discount points is hidden or not included.
The views and opinions expressed on this site about work-related matters are my own, have not been
reviewed or approved by Supreme Lending, and do not necessarily represent the views and opinions
of Supreme Lending. In no way do I commit Supreme Lending to any position on any matter or issue
without the express prior written consent of Supreme Lending’s Human Resources Department.