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Point-Rate Combination

Posted on: 12th Aug, 2005 05:23 am
Points or discount points are a form of prepaid interest paid by a borrower at the time of closing. Each point is equal to 1% of the loan amount. Lenders generally give the option of paying points with respect to lowering the interest rate for the entire loan term.

Usually each point lowers the interest rate by 0.125%. But there are lenders offering fixed rate mortgages where the interest rate is lowered by 0.250% and adjustable rate mortgages with rates being reduced by 0.375%.

Points can also be negative. If a borrower pays -3 points at closing, then this implies that the lender is actually paying 3% of the loan amount on behalf of the borrower. Thus the lender charges a higher interest rate on the loan amount, that is, a rate which is 3% above its original value.

It depends on the lender whether a borrower requires paying points. There are lenders who ask for 1 or 2 points and those who don't require points at all. Lenders who do not charge points generally ask for higher interest rates on the loan amount. The point-rate combination varies with different loan programs offered by each lender. Depending on this combination, the monthly payments also vary.

Related Article
I just want to add a little more which may help to understand the point and rate relationship.

Generally a mortgagor is given a variety of rate and point combinations for a particular loan product to choose from.

So, while choosing a suitable lender try to compare the rate and point combination along with the loan fees for a particular loan product instead of just comparing rates. While comparing the point and rate combination you should consider every parameter for the same loan type offered by different lenders.

Here is a simple example to see the relationship between the point and rate combination and how it can be used to compare the offer between different lenders for a particular loan.

Let us consider the example for a 30-year fixed mortgage with the loan amount of $100,000.

Lender 1
30 Year Fixed Rate Mortgage
Loan Amount: $100,000
Lock in Period: 45 days
Lender 2
Rate
Points
Rate
Points
7.125
1.000
7.000
1.375
7.250
0.500
7.125
0.875
7.375
0
7.250
0.375
Loan Fees: $500
Loan Fees: $730
Comparison of loan offers at an interest rate of 7.125%.
Lender 1
So, it can be easily seen that
"Lender 1 has the better offer"
Lender 2
= $500 + (1% of $100,000 )
= $730 + (0.875% of $100,000 )
= $500 + $1000
= $730 + $875
= $1500
= $1605


Thanks,
Samantha
Posted on: 10th Dec, 2005 10:45 am
What means 0.750/1.000 points?
Posted on: 11th Mar, 2009 11:46 am
Hi Fuming!

Welcome to forums!

I guess you are taking a loan and your lender has asked you to pay points. Discount points are a form of pre-paid interest. It will help you in lowering your mortgage interest rate. On the other hand, there is an origination fee which is associated with an account with a bank, broker or other company who provide services for handling the processing associated with taking out a loan. I think, you should contact your lender and clarify with him.

Sussane
Posted on: 11th Mar, 2009 11:23 pm
When are (discount) points "paid"? Do they get wrapped into the new loan, or does the borrower write a check to the lender?
Posted on: 20th Apr, 2009 01:33 pm
Holm, it can be handled either way.
Posted on: 20th Apr, 2009 05:44 pm
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