Question by Jes: Can anyone explain the points system in refinancing a mortgage?
I understand loan officers charge certain amount of points to do the loan, and i know a buyer can purchase discount points. But why do they have those points and why do they sometimes charge points out the back? and how does their amount of points help the Loan officers profit or commission?
i would really apreciate a response, thank you!
Answer by DakB
1 point is usually equal to 1% of the loan amount. That said I should tell you that one way or another the lender will get paid! either in points up front paid by the buyer or seller (negotiatble) or in adding up the interest rate instead. It’s all income to them. The loan officer has a “split with the company that they work with the same way a REALTOR has with their broker 1 point may mean that the loan officer or mortgage broker will get anywhere from 50-75 or higher percent of that number. In mortgages the splits are between broker and company. In real estate it is split 4 ways. Listing agent and office/Selling agent and office. So what we actually get paid varies by our split with the office as well. So much for getting paid well until you get smart enough to negotiate a better split for yourself. I always like to think that you should hire a REALTOR who can negotiate the best rate for themselves so that they do the same for you. See? Good luck with that and choose well with the Lenders..there’s a lot of stuff going on out there. Pick a known company.
Give your answer to this question below!
Let me clarify what a “point” is, and what an “orignation fee” is. Both equal 1% of the loan amount. However, “points” are used to buy down the interest rate and are in fact pre-paid interest, which is tax deductible. An “origination fee” is what you are actually referring to in your question. This fee is profit to the lender.
When the lender receives their fee upfront from the consumer, it is an “origination fee”. What you refer to as “out the back”, is a “yield spread premium” and is paid from the investor to the lender. A higher “yield spread premium” (YSP) to the lender can result in a higher rate to the consumer, but now always.
Here is an example: Say you’re shopping for a 30 yr fixed rate mortgage. The broker will shop the loan with several different lenders. If the best priced lender has a rate of 6.00% at par (meaning no YSP and no points), then the broker will charge an origination fee in order to make their profit. But say you want a lower rate of 5.75%, then the broker must see what the lender is charging for that rate. Let’s say it costs the lender 1.5% to buy the rate of 5.75%; that 1.5% would be charged to you as “points”, and may charge another 1.5% in “origination fee” to make his profit.
But what if you don’t want to pay any points or origination fees? That’s when the broker will quote you a rate that gives him his desired YSP like maybe 6.5%. (the above examples are for demonstration purposes only – actual rates will vary)
As the previous poster mentioned, the lender’s profit is then split between the Loan Officer and the Broker.
Ask your lender to give you various quotes and compare the monthly costs and closing costs to see which scenario makes sense for your individual needs.
you can the details on this site http://realestatepropertynews.com/refinancing-a-mortgage.html