Many customers I talk to have already heard of points and want to know if I’m quoting any points with my rates. Points typically have a negative connotation and rightfully so – they are probably the most commonly abused vehicle for predatory lending. Points are commonly referred to by lenders as “discount points” and sometimes “origination fee” which is confusing because the application fee is also referred to as origination fee sometimes but they are completely different.

The purpose of a point is to obtain a lower interest rate in exchange for paying a one-time lump sum at closing. Points can be used to offer artificially market lower interest rates to lure customers in much like when automotive companies offer eye-catching lease offers on cars until you call or read the fine print. Chances are if you are seeing an online quote for a rate that “blows away the competition” somewhere in the fine print it’ll mention something regarding discount points, or origination fees.

Points are charged in eights (.125%) as a percentage.

As a general rule, I don’t quote rates and I don’t typically suggest paying them but there are some instances where I might make mention. In certain cases when pricing out a loan it might be possible to obtain a .125% lower rate (for the life of the loan) for only .125% or .25% additional points in which case I would provide the buyer the math to make the decision themselves. Here is an example of what I might suggest.

“(Client), I’m just noticing you are at 4.25% 30 year fixed today but if you were to pay .125% in points I can actually get you to 4.125%. Let’s see if it makes sense.”

Then I would provide this math:

$400,000 loan at 4.25% = $1,967.76

$400,000 loan at 4.125% = $1,938.60

Savings = ($1,967.76-$1,938.60) = $29.16

Cost of point: $400,000 x .125% = $500

Divide cost by savings

$500/29.16 = 17.14. So in 17 months the borrower will recover the $500 cost (by saving $29 per month) and then after that 17 months for the remainder of the loan they will be saving $29.16 for the remainder of their loan.

This will not always make sense. If the cost to obtain the 4.125% is .50% for example - now the borrower is paying $2,000 to save $29.16 which takes 68 months to recoup. Something somebody may be interested in but not necessarily a “no-brainer”. This becomes a personal question to the borrower – is it worth paying this extra money upfront to secure the lower rate and savings longer term.

The things to consider are:

Opportunity cost – What else could you be doing with that extra money?

Length of loan – Are you going to be in this house for that period of time or might you refinance or sell?