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Personal Finances / Buying or Selling a Home


Subject:  Re: Refinancing without paying points? Date:  4/20/2001  1:44 AM
Author:  Dwdonhoff Number:  19387 of 128348

Hi rmonson,

You asked;
We are considering refinancing. My parents tell us never pay points on a mortgage, but when I suggest this to lenders they look at me like I'm nuts. What am I missing? Does anyone know of a lender that has a good rate (under 7.5) and doesn't require you to pay points?

"Points" means different things to different people outside the actual finance industry. Some people understand them to be strictly the discount fees you can pay to get a lower interest rate, some feel it counts towards the whole bunch of closing costs, some feel it represents the compensation to the loan officer or banker. I'm actually in the business, and I can tell you they are all somewhat correct, but only partly...

Every different type of mortgage loan has three basic Money Parts...
1) the interest rate,
2) the Yield Spread (or discount points, or rebate, etc.),
3) the real, cash closing costs paid at closing.

You could think of these as three sides of a triangle, with the area inside the triangle being the real costs of the transaction. The inside area is somewhat negotiable, but only to a point, as nobody will work for free, and there's a lot of people involved in making the loan close. Still, the public usually only focuses on one or two sides, so the industry adjusts the remaining side(s) to allow the costs to be covered.

The public is aware of the interest rate, of course... but the confusion comes from the thought that the interest rate is the ONLY variable, therefore a loan could be shopped by comparing rates only. Of course, that's not the case at all.

The 2nd thing the public becomes a little more aware of are the closing costs. These include fees for a plethora of things that have to be done to get a loan accomplished, including appraisal, title search and insurance, closing agent (escrow), origination, processing, underwriting, tax service, recording, credit report, document prep, and another half dozen minor things.

The 3rd side to the triangle is the yield spread premium... also known as the discount points, or the rebate points. These change daily, sometimes several times a day... and actually determine what interest rates you will hear about when you shop.

Here's an example;
Let's look at a $200,000 mortgage...

The real, cash closing costs necessary to pay all the players involved will run about $4,200 to $4,500. Now I can already hear readers murmuring about how high that sounds... but trust me, that IS how much cash is actually paid to the professionals that do the deal when it gets done... it just rarely is disclosed to the public because t