I've decided that on the rates I post, I'm going to start doing so without any discount or origination points. It seems to be the "norm" to have mortgages priced with a point and it's your choice on whether or not you have your mortgage priced with or without a point.
A point is simply prepaid interest. Points are shown on the Good Faith Estimate on either lines 801, 802 or 808. One point equals one percent of the percent of the loan amount and typically impacts the rate by 0.25%. Often times, consumers are tempted to pay points because the rate looks more attractive at 0.25% lower.
Here's an example based on a $400,000 loan amount.
One point = $4,000 providing a rate at 5.75% and a principal and interest payment of $2,334.29.
Zero points provides a rate of 6.00% with no additional cost (points) and a principal and interest payment of $2,398.20.
Which rate would you select? Many are tempted by the lower rate which will save them (based on this scenario) $63.91 per month in mortgage payment. Dividing the monthly savings into the additional cost (the point) of $4,000 appears as though you'll be breaking even in 62 months. You're planning on staying in your home for over five years so why not pay the point, right?
What if instead of paying a point, you apply the money you would have used to pay the point to reduce your loan balance:
$400,000 less the $4000 point = $396,000 at 6.00% = $2,374.22 for principal and interest.
The savings between this scenario and paying a point (above) is now reduced to $39.93 per month. Now the "break even" period is 100 months or 8.35 years (4000 divided by 39.93).
My point is there may be better ways to use your money than paying points. What if instead of paying a point, or paying down your loan amount, you use the "point money" to pay off a debt? It's great when the Seller is offering to pay points or closing costs...and if you really want that lower rate, then pay the point. How your mortgage is priced is up to you. It makes no difference with how a mortgage originator is compensated.
So back to the rates I publish on various blogs. My rates may seem to be about 0.25% higher than before since I will now be pricing rates without any points...just keep in mind that's because they're pointless.
Update: There may be some time to pay points...such as the borrower really needs the lower rate to qualify or the pricing is better than the typical 1% of the loan amount to 0.25% rate.
