Dennis' Mortgage Blog

Question of the week: What are points and what is the difference between discount points and origination points?  Answer:  Last week I addressed “What is APR”, this week I will address the biggest component of APR: points.  When quoting interest rates there are two numbers, the rate and the fee; the rate is stated as a percentage the fee is generally stated as points.  The rate is the interest rate charged for the life of the loan and determines the monthly payment.  The points are the upfront cost of the loan and represent a percentage of the loan amount.  On a $300,000 mortgage one point is one percent of the loan amount, $3,000; one and a half points (1.5 points) is equal to 1.5% of the loan, $4,500; and so on two points equals $8000. 

Discount points on a transaction are the cost of the money at the wholesale level, before mark up for the originating entity.  A loan at “par” is one with no points charged to the originating entity.  A loan with a rebate, or premium, or yield spread premium, is a loan where the lender or bank pays a fee to the originating entity.  Whether a loan is at a discount, par or a premium depends on the rate.  Think of a teeter-totter, as the points go down the rate goes up and vice-versa; so a $300,000 loan may have a cost of 2 points at 4.75%,  1 point at 5.125% and perhaps no points at 5.5%---the higher the rate the lower the points.  Since no one works for free, not even the clergy, the higher rate indicates a rebate is being paid to the originating entity.

If I have a client with a $300,000 I look at a lenders rate sheet and it may say that at 4.75% if will cost me, before any client charges, 1 point—this is a discount fee or point, on the Good Faith Estimate I would indicate this by have 1.00 in the line item for discount points, a $3,000 fee.  In addition I need to get paid for my services so I would have an additional fee of say 1 point as an origination fee.  In this fictional scenario the Good Faith Estimate would include 1 point for discount and 1 point for origination—I would quote a 2 point loan as all the points total 2 points; I have seen/heard of others who do not quote the origination fee of 1 point but only the discount point.  When getting a loan quote make sure the discount and any origination fees or points are all quoted.

If we have a loan at “par” pricing there are no discount points quoted on the Good Faith Estimate and any points should be on the line for origination fees.  Similarly, if a loan has a high enough rate there would be no points on the discount point line nor the origination fee line. 

When getting rate quotes it is very important to compare apples to apples, many a client has gone to sign loan documents that have fees and costs that were not properly disclosed.  Keep in mind the axiom “if it looks to good to be true it probably is” if one lender is quoting a lot lower than others in rate and or in points get more detail—after all no body works for free.

Have a question for me?  Ask me!  

With the G20 Summit in London not solving any problems but adding even more

Government funds to the world economies inflation concerns continue to dog the mortgage and bond markets.  As a result we have seen a pop in rates the past two days, particularly in the hi-balance conforming and FHA rates. 

Part of the increase in rates is a reaction to the global, and national, economy; a bigger part is the continuing dominance of the Mortgage Backed Securities market by conforming mortgages of the non-hi-balance variety; i.e. those under $417,000.  This market continues to attract investors knowing the U.S. government is active in purchasing these bonds which keeps prices artificially high—and rates low.

What I do not know, well that is an open ended statement as there is a lot I don’t know, is whether our recent uptick in rates is the very beginning of a long term trend to find a new trading range for mortgages, and therefore rates, or if it is a short term tick as investors take profits for their portfolios.  One thing that is apparent the past few weeks is that investors are liking U.S. stocks.  As I mentioned last week there is a ton of cash in banks and investor accounts and for the time being they can move significant amounts of that cash into both stocks and bonds and cause both markets to go up.  This trend cannot continue for too long however as at some point the cash will begin to get a bit more scarce and investors will have to make the decision between fixed asset investing—bonds; or equity purchases—stocks.

After four weeks of dropping or flat rates for conforming rates we see an uptick this Friday.  Because of the larger attraction of the “regular” conforming mortgages as compared to the ‘Hi-Balance” or jumbo-conforming mortgages the spread between the two has once again hit one-half of one percent, of greater significance is a similar separation between the conforming and FHA rates this week. 

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional  4.75%                 Up  0.125%

30 year conforming-jumbo 5.25%                     Up  0.25%

30 year FHA    5.25%                                      Up  0.25%

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Any dog lovers out there who are in need of a wonderful pet I have a lead for you.  One of the sisters of our puppy, in age since he is almost 8 months but in size he is not very puppy-sized, is available.  Charlotte is, like our Harrison, a sable colored smooth coated Collie (short hair, not long like Lassie) and unfortunately the family that purchased her from the breeder lost their home back East and gave Charlotte back to the breeder.  They would like to find a good home for her, and Harrison would probably like to have one of his sisters local!  If you are interested or know someone who is please contact me and I can send you a picture of Harrison so you can see what the family looks like and also put you in touch with the breeder.  The breeder is a husband and wife who are registered by the AKC and very active and involved in the Collie Association—they are very legitimate.  If Charlotte is like Harrison she is great with kids and a family, sweet, loving and wanting to meet people and other dogs—truly a great pet.

Do you Facebook?  If so “friend” me, I’m listed as Dennis C. Smith!

Have a great weekend,

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.