Mortgage : DOES PAYING POINTS ON YOUR MORTGAGE MATTER? : Strongsville Real Estate

By:
CJ Harrington
Keller Williams Realty
www.cjharrington.com
cjharrington.crs@gmail.com
440.336.0612

Date:
10-22-08

Points are an investment on which the return consists of lower mortgage payments in the future and a lower loan balance if the loan is paid off before term, which almost all are. The investment makes sense for borrowers who have the money and find the return high enough to be attractive. The standard view is that the borrower's time horizon must be quite long to make points worthwhile -- I have made this statement myself many times. However, when I recently calculated rates of return for different types of mortgages, I found that the standard view holds only for FRMs. On ARMs, the returns are high over periods equal to the initial rate period.
Do most borrowers pass up this opportunity? They do. Borrowers are predisposed against an increase in their cash outlays at closing for a benefit that will accrue in the future. Nobody tells them what the rate of return on investment might be. Often, they aren't even offered the option. Most mortgage brokers and loan officers don't encourage borrowers to pay points. Points make it more difficult for loan officers working for lenders to earn an "overage", a price above the lender's stated price, which the loan officer usually shares with the lender. Similarly, if borrowers pay points for a lower rate, mortgage brokers are forced to disclose their own fees upfront where borrowers can see and possibly question them. The broker can't avoid disclosure when his fee must be added to the points. It is much better to steer the borrower to a loan with a rate high enough that the lender will pay points to get it, referred to as a "yield spread premium," or YSP. Then the broker can pay himself out of the YSP, which existing rules permit to be disclosed in ways that usually mean nothing to the borrower. So, what does this all mean to you? Well, firstly read this article, and then ask you lender the questions you have. Odds are you'll not only become more informed, but you will pick a better financing option for you.

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