Mortgage Skinny

Just last week my Broker refunded money back to a client whom he had recently refinanced. My Broker had audited the file and discovered that he had been paid about $600 too much by escrow due to a clerical error. So, he sent a check back to his client. Boy was that client pleasantly surprised. I, however, was not surprised. That is who my Broker is. The Broker could have just kept the money, and no one would have been the wiser. But he had promised the client that the cost of the loan would be a certain amount. And he kept that promise.

If you want an ethical Broker for your Real Estate needs, please contact my Broker, Geoffrey Gault. 408-573-0811 office or gwgault@gmail.com

Check out his website, too.     Geoffrey Gault Real Estate

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In this post I am going to go over one of those “borrower options” I mentioned on my home page.  Only full-disclosure Mortgage Brokers and Agents will tell you about this.

First I will define “point.”   In the mortgage industry, “1 point” means 1 percent of the loan amount.    Therefore, if you have a loan amount of $430,000, then 1 point (or 1 percent) is $4,300.

“Points” have gotten a bad name because they have not been fully explained or fully disclosed to most borrowers.  Paying points is not necessarily a bad thing as long as it is your choice whether you are paying them or not.   Stay with me here while I explain this to you.

Here are two ways this can be used by the borrower:

1)  You can use points to buy down your mortgage rate thereby having a smaller monthly mortgage payment.

2) You can get the lender to rebate points back to you to help pay for the closing costs of the transaction.

There is never just 1 interest rate available for the borrower.  There is a whole range of rates available every day.   So when you hear that “today’s rate is 5.25%”  you really don’t know what that means unless you know what “par pricing” is.

And here is what “par pricing” is:   Par Pricing is the rate at which the borrower is paying NO points to the lender to get that rate, and the lender is rebating NO points back to the borrower to help pay closing costs.

To buy the rate lower than the 5.25% rate above, you pay points to the lender.   As an example, maybe you don’t want 5.25% as above.  You want 4.875%.  Okay, the lender might do this for .5% (half a point).

If you are buying a house, finances may be tight and so you want some help to pay your closing costs. The lender can raise your interest rate a little but give you points back to help with closing costs.

Here is a visual example of “par pricing,” “rebate pricing” and “paying points” on a 30- year loan:

rate pricing:

5.25%  <0.25%>  This rate means that you will get .25% (one quarter of a point) of the loan amount back as a rebate from the lender.  This is rebate pricing, or “points” back to you.

5.00%   0.00 THIS is “par pricing” where 0.00% means no points to the lender, and no rebate from the lender.

4.875%    0.25%    This is paying points which means that you are willing to pay the lender 0.25% (one quarter of a point) of the loan amount to get a lower rate.

The rip-off occures when the borrower is told that “today’s rate is…” and that rate is actually rebate pricing, not par pricing. The agent is now getting an undisclosed rebate back to himself at the expense of the borrower. The borrower needs to be given par pricing and then also given a choice of buying the rate down or getting a higher interest rate in exchange for a rebate back to him, not the agent.

The moral of this post?  Demand full disclosure from your Loan Agent.   Use points to your benefit, not the benefit of the Agent.

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