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Our final entry on points leads us to most well know of point fees, the discount point.  According to bankrate.com ” These are actually prepaid interest on the mortgage loan. The more points you pay, the lower the interest rate on the loan and vice-versa. Borrowers typically can pay anywhere from zero to 3 or 4 points, depending on how much they want to lower their rates. This kind of point is tax-deductible.”  Not to be confused with broker or origination points, discount points are paid into the loan to gain a lower interest rate.  Because these points are tax deductible and result in a  monthly payment it would make sense to sacrifice a bit upfront to gain savings in the short and long term.  Unfortunately due to the total fee package associated with loans this option is typically waived or denied by most.  Discount points are found in the 800 section of your initial good faith estimate and are charged separate from broker or origination points.  You may pay a broker or origination point and as well a discount point.  The later is in no way associated with or affect by the first.  Broker and origination points are administrative fees paid to the agent or agency providing your loan.  Discount points are used to buy down the interest rate regardless of the broker or origination charges.   The important thing to keep mind when considering discount points is GET MULTIPLE QUOTES with discount points and without.  The result of discount points should be a lower than average rate.  The way to test the rate is to get a few quotes without discount points.  Once you have those take the lowest rate quote and request the same with 1 discount point charged.  You should see a nice improvement to the rate and payment with a slightly higher upfront cost.  If this is important to you then discount points are the way to go.  If not… be sure to shop for the best and don’t settle quickly.

-The Stork

To continue our discussion on points let’s next look at origination points.  Bankrate.com give a brief but wonderful explanation of exactly what these points are and what benefits you gain by paying them.  They state, “This is charged by the lender to cover the costs of making the loan. The origination fee is deductible if it was used to obtain the mortgage and not to pay other closing costs. The IRS specifically states that if the fee is for items that would normally be itemized on a settlement statement, such as notary fees, preparation costs, and inspection fees, it is not deductible.”  To know if the fee is tax deductible it must be listed in the 800 section of the Good Faith Estimate on the line specifically designated for the origination fee.  If it is a fee package charged by the lender that includes other items it is not tax deductible.  If you are working with an agent that charges you an origination fee make sure to ask them if this is an individual fee charge to origination your loan or if it is a bundle of other fees assessed as a part of your total closing cost.  One big point is this fee is typically negotiable.  For example if a lender sends you a good faith estimate with a 1.5% origination fee and rate of 5.5% and another sends you an estimate with a .75% origination fee and a rate of 6% you can approach the agency with the higher cost and lower rate and attempt to negotiate a lower cost while preserving the lower rate.  One other big point is origination points are typically charge by lending institutions, whereas broker points are charged by brokers.  It is not typical to have both an origination and broker fee show up at the same time on a good faith estimate.  If you do see that question it immediately.

-The Stork

Continuing our discussion on points let’s first look at the most ridiculed of points: Broker points.  Broker points are much like origination points, they are points paid to a broker for originating your loan.   The reason I say this fee is ridiculed is simply due to the history many mortgage brokers have created by conducting bad business.  Many loan originators are quick to cast a disapproving eye on brokers warning consumers to beware of brokers and their hidden cost.  What most consumers don’t realize is brokers are required just like lenders to disclose their cost.  Brokers also usually have more room to negotiate both their cost, the overall rate, and terms of your loan.  Brokers also have the ability to shop major loan providers for you without the multiple credit pulls or time you would use doing it yourself.  Just as you would pay a mechanic to fix your car, you are paying a broker to negotiate your loan terms, to provide you with assistance, and to support you through your purchase or refinance.  At times it’s an easy job and times it requires many phone calls and much research to over come obstacles that may stand in the way of your loan.  The key is to find a broker who is fair and willing to negotiate a competitive cost and rate for your loan needs.  Don’t be afraid of the big bad broker.  Embrace him or her and realize you are actually recruiting a quarterback who has the job of leading you down the field and into the in zone. 

- The Stork

In the market to purchase or refinance?  There is much to do and much to prepare for.  While scrambling to gather needed documents or establish moving plans have you stopped to think about the cost?  Most will say yes and that is a good thing.  Hopefully this post will help you better stomach a small but significant part of your overal settlement cost.  POINTS!!!  Don’t run… it is a necessary evil to your closing cost.  The question is how great of a necessity are they?  The truth is one way or the other you’re going to pay so it’s better to get an understanding of what you’re paying and how much control you have over what you’re paying.  The three types of points that can be assessed as a part of your closing cost are origination, discount and broker points.  These points are assessed by the lender, broker or agency providing your loan.   A point is equal to 1% of the loan amount charged as a fee.  For example 1 point on a $100,000 loan is $1,000.  You can be assessed multiple points on your loan up to usually around 4 points and it can be spread between broker or origination and discount.  It is highly unusual to have all three charges.  If you do question it thoroughly and seek additional estimates elsewhere. 

Origination points are typically charged by direct lenders and banks as a fee to originate your loan.  Broker points are charged in the same way by a broker originating your loan.  Discount points can be charged by both lenders and brokers.  These fees are typically the only true fees you can negotiate as a part of your closing cost.  Most other fees are non-negotiable third party fees such as title fees, taxes, and prepaids.  You can negotiate both origination and broker points with your loan agent.  For example if you have multiple quotes and the one with the best rate also has the highest origination or broker fee you can contact that agent and make them aware of this and ask them if they are willing to negotiate to a lower fee to earn your business.  Be ready to send the agent the competition’s estimates if he or she is willing to negotiate.   While you have some power to negotiate discount points it is typically a bit more difficult as these fees are set in increments to obtain a lower rate than the going rate.  For example if the going rate is 6.25% you can pay 1 discount point to gain a rate usually .25% to .5% lower.  Likewise, 2 points will earn you a discount of up to .5% to 1%, thus the term discount points.    

There is much more to understand about these three fees.  So much so that we will be exploring these individually in three seperate postings within the next week or so.  Until then, please post any input or comments you may have.

-The Stork

Is there such thing as a no closing cost loan?  To date I honestly have not found or seen one outside of calling a close friend or relative and asking for a cash loan.  Unless you keep company with millionaires this is not a great possibility.  The honest truth is there will always be some type of cost associated with your loan.  If purchasing these will be paid at closing.  If refinancing the costs are wrapped into the loan unless you wish to pay them at closing.  The bottom line is expect some form of cost.  

Purchase
Here is a brief sample of a good faith estimate for a purchase (sample-gfe).  This scenario is for a 30 year fixed conventional loan with a total down payment of 20% based on a $200,000 purchase price.   The 800 section is typically the broker/lender associated fees.  When there is no broker, origination and or processing fee associated with your loan it is considered a no closing cost loan.   Note the additional fees under the 800 section.  You will have prepaid interest, escrows (can waive with 20% down or greater), title fees, county and state fees and miscellanious fees such as a survey.   When there is no or a very low fee in the 800 section expect to pay a higher rate which means a much greater expense monthly and over the life of your loan.  Every agent is going to try and make money somewhere.  If it’s not up front it will be in long term interest rate. Therefore, it is best to have an honest broker/officer who will negotiate the best rate and orignation/broker fee with you.  It is honestly better to pay a little now to save a great deal later.  Get 3 or more quotes and you will see what I mean.

Refinance
Closing cost for a refinance are a bit different than a purchase because they are not required to be paid out of pocket.  They are typically wrapped into your loan which gives you greater flexibility.  Here is a sample good faith estimate for a similar refinance (sample-refi-gfe).  This is assuming your house is worth $200,000 and you owe $154,000 on your current mortgage.  You will be paying off your current mortgage in hopes of gaining something.  This scenario is a better interest rate.  At the moment most refinances are to get cash out to consolidate debt or accomplish some goal.  In either situation the cost sections are the same with the same philosophy holding true for the 800 section.  Where there is no or a low cost in the 800 section expect a higher rate.  At the bottom of the estimate you will find how much cash is left over to pay or receive after all designated debt has been paid including the closing cost.  This new loan of $163,000 includes paying off a $154,000 mortgage and paying $8,182.67 in closing cost.  The remaining balance of $817.33 will be paid to you or credited back to the loan.   If you wanted cash out or more cash out you would simply need/want to increase the loan amount.   This would result in a higher payment and possibly other obligations like mortgage insurance but that is another post.

All in all the truth to a no closing cost loan is false.  Expect to pay and remember it is better to pay a little now and save a lot later than to be lead to believe your are paying little now and getting the best rate.  I would appreciate any feed back or questions.  If there are any feel free to comment. 

- The Stork