FAQ |

# Paying Points when Refinancing

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Is it mandatory that points be paid when refinancing (and if so what is average)?

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No, it is not mandatory that points be paid when refinancing and, in fact, in “normal” times it usually does not make sense to do so. This is because if you compare the cost of the Point(s) (each Point represents 1% of the loan amount) to the amount it saves you each month, it normally takes so long to recapture the Point you are better off putting the money in your pocket and accepting the slightly higher monthly payment.

For example, on a \$200,000 loan, a point will cost \$2,000; it usually lowers your interest rate by .25% (a quarter of a percent) which saves you about \$32 per month. Divide that into the \$2,000 and it will take you 62.5 months just to break even—over 5 years. I don’t know about you, but I would rather have the \$2,000 earning interest for those five years. Not to mention, many people will have sold the home or refinanced before they even break-even.

Having said that, in today’s market the yield curve is very flat, meaning 1 Point MIGHT lower your interest rate by up to a full 1%. This means that \$2,000 will save you about \$124 per month, resulting in it taking only about 16 months to break-even. This is a deal I would take.

To answer the second half of your question: there is no average. I am afraid the whole business is much more complex than most want to admit. The real question is, how low do you want to go with your interest rate; how much lower can you go for each increment of Point paid; and, does it make sense in terms of how much it lowers your monthly payment (see above discussion).

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The old adage, “everything is negotiable” applies to mortgage transactions.  Why do you think we call them “deals”?

What you need to know is what are you really paying overall. You first need to know how we make our money.  We can charge you points – one point, in my opinion very reasonable.  One point means one percent of the loan amount.  So if your loan is \$200,000, the point is \$2,000.  This assumes that the loan is of average difficulty and the borrower is cooperative.

It is difficult to state an average as it may vary according to the scenario, situation, degree of difficulty, etc.

You also need to know about “back end” or yield spreads (YSP) money.  That is when we increase the rate so we make money on the rate as well.  This is legal but can be abused by unethical practitioners.  For example, let’s say that you qualify for a conventional 30 year fix rate.  Let’s say that today’s such rate is 5.0% at par  Par means that is the break-even rate where there is no profit for the broker.  The broker may increase it, say by .375% for a total rate of 5.375% and may get paid .375% of the loan amount (\$200,000)or \$750 on a .375% increase to your 5.0% rate.

A confident and experienced broker or loan officer will be upfrontand tell you what they charge without playing “hide the ball.” Keep in mind that we only get paid on the points or YSP.  It is perfectly ethical and legitimate to be charged a point when refinancing.  Again, you may have the option to pay it as part of your fees (escrow, title, appraisal, etc.) or you may also opt to increase your rate to eliminate the point(s).  Sometimes you may read an ad that says no points, no fees, etc.  Well, not entirely true as some one has to pay the escrow, title appraisal, mortgage broker, etc.  If that money is not paid out of your pocket, the rate is increased to make up for those cost factors – this is practiced by brokers and retailers alike.

Understand your deal, all the cost factors and negotiate a win-win.

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If by “mandatory” you mean “you must always pay points when refinancing,” the answer is “no”.  You do not necessarily have to pay points in order to refinance.  However, whether or not you pay points may, depending on your situation, determine how much bang you get for your buck in connection with your refinance transaction.

For example, let’s say you have a balance on your loan of \$180,000.  You go to your local community bank and find out that it’s current rate is 6%, which would give you a payment of \$1079 in a refinance.  The loan officer also gives you the option to lock in the rate at 5%, if you pay two points (\$3600).  At 5%, your payment would be \$966, making the difference between the two payments \$113.  Dividing 113 into 3600, gives us 31 months, which is the break-even point in determining whether or not paying points makes sense.  For every month you keep the house after 31 months, you’re \$113 ahead.  So, in this example, the borrower does not **have to pay points; it makes a great deal of sense, though, if the borrower plans on keeping the house (and not subsequently refinancing) within the next 31 months.

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Hi Rod. No, it is not mandatory to pay points on a home loan. However when you pay points you “usually” get a better rate. These are called “discount points”. The rates you see advertised are usually quoted with points to make the rate look lower which in turn makes our phones ring.

In a nutshell a 0 point rate will be higher than a rate with points. Based on your needs you need to figure out if it’s worth it to pay the extra points for the lower rate. Find the payment difference with and without the points. Then find the cost of the point. Divide the cost of the point by the monthly savings and that will give you the months it will take to recover the extra cost.

Example:   \$2400 (cost of point) / \$150 per month savings vs. 0 point rate = 16 months to recover the cost. If you are going to be in the house longer than 16 months, it may make sense to buy the points and get the lower rate.

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I agree with every answer that has been given to you so far.  But there is one point I would like to make.  Points are not mandatory in any transaction.  But every “deal” is different.  Some brokers may tell you points are mandatory in certain situations.  Let’s say you want that 5% rate on the new loan.  As stated earlier, 5% is roughly at PAR.  Meaning there is no yield spread being paid to the broker.  But you are still being offered maybe 5.5% and are being told that if you want that rate you have to pay points.  But everyone is offering that rate with no points.  My point is every transaction is different.  Maybe your credit scores do not meet a certain level or the LTV (loan to value ratio) is high.  All lenders will charge brokers for these factors.

For Example, let’s just say you are applying for a conventional mortgage with an LTV of 80%.  This means you owe 80% of your house’s worth.  And your middle credit score is 680.  Most banks are charging the broker one point for this scenario.  So that 5% rate now cost the broker one point to break even.  So of course the broker will tell you that points are mandatory in your situation.  There are so many different factors in the mortgage process that a broker has to consider before quoting rates.  It’s just not that simple for someone to call and ask “What is the interest rate today?” In our industry we call these factors add-ons.  Our rate sheets of filled with different matrices that we have to carefully go over before we can quote a rate.

Also, I agree with watching the ads for zero closing costs.  There is no such thing.  I have also being seeing brokers claiming zero point loans and charging origination fees.  To me these are points and are another way for a broker to be compensated.  I have lost many customers to other brokers claiming they are getting a zero point loan on a deal I quoted a rate with one point.  So obviously I lost the deal.  Only for me to find out later that they were charged an origination fee.  And I usually find out when the customer moves again or want to refi again and comes back to me because I was honest up front.

Good luck shopping and I hope you find a good deal!

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Points are a function of interest rates. You need to do the math. You have to throw out all the old rules about what a point is worth and what the rate is. In today’s new world, there is a huge gap between the cost of funds with and without paying points. Many investors, afraid of quick payoffs of new loans, share pricing that provides the best rates with some cost to the borrower.

Do the math. Ask for zero point, one point, and 2 point rate quotes from your lender. Then divide the monthly payment savings into the total points paid to get the number of months before you benefit. Also, be aware of the term! Adding more years to your loan costs you money. You have three things to look into. Monthly payments, number of payments, and total amount of the loan. All three need to work for you.

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In today’s rate environment, points often offer little benefit for the cost. I seldom advise a client to pay 1% to lower his rate by perhaps .25%. More often than not, we end up with a slightly higher rate, allowing me to pay closing costs rather than rolling them into the loan. Always need to look at the payback when considering points: if it costs \$2000 and you’ll save \$50/mn, will take 40 months to break even for the cost. Question is whether how long you’re sure you’ll be in the home past the break even point.

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