One of the first questions lenders hear from prospective clients is DO YOU CHARGE POINTS? While the meaning behind the question is fair, learning what points are will help you understand an important piece of the mortgage process.
To begin, let’s start with a definition:
Points – Fees paid to or received by the lender, which directly impact your rate, either by lowering or raising it. One point equates to 1% of your loan amount.
Using the above definitions, we can now better understand that points directly affect your mortgage rate. The act of buying points refers to paying fees upfront to secure a lower rate, while selling points is just the opposite. When you sell points, you are accepting a higher rate in return for credit from the lender to cover some or all of your closing costs.
Is buying or selling points right for you? Depends upon your particular situation. Take a look at the example below:
$700,000 Loan Amount
4.25% Standard Rate
$3,443 Monthly Payment
Now let’s take a look at what happens when we buy 1 point (or 1%), which reduces the rate by .25%.
$700,000 Loan Amount
4.00% Standard Rate
$3,341 Monthly Payment
$7,000 Points Charge (1% of loan amount)
$102 Monthly Savings
68 # of months to break even ($7000/$102 = 68)
Does it make sense to buy points in this case? Generally speaking, I would say NO. 5+ years to get your money back is much too long. A similar calculation can be done regarding selling points here to determine if it makes sense, given your situation.
I hope this helps to unravel the mystery surrounding points. Please reach out should you desire any further clarification regarding how points work, or want to walk through your mortgage options with one of our loan officers.
David Setti is the branch manager at O2 Mortgage. Throughout his nearly 20 years in the residential lending space, Dave has been a leader within his company and the industry as a whole. He has been nationally recognized as a top loan originator by Scotsman Guide multiple times in past years. He spends his time now coaching other loan agents on how to be top producers and still enjoys guiding clients through the home loan process.
Raised in Southern California, Dave moved to the Bay Area in the early 90’s to pursue a bachelor’s degree from Santa Clara University. After graduation, Dave found himself in a director’s role in the corporate interiors industry. Following several successful years in the industry, he changed directions to pursue his passion for finance.
Dave has helped thousands of clients discover the joys of homeownership throughout his career. With a focus on affordability over merely qualification, as well as providing a thorough education to his clients on the process of lending, he has helped make the process of securing a mortgage a positive experience.
For the last 5+ years, Dave has served on the board of directors with PACE (Pacific Autism Center for Education), a nonprofit organization, providing high quality programs for individuals with autism and associated developmental disabilities.
He lives in San Jose with his wife and son. In his free time he loves to cook and can often be found at the Shark Tank, rooting on his hometown team to win the elusive Stanley Cup.