Can someone explain the concept of Discount Points in a nutshell? What are they? Why and how do they benefit the borrower and why and how do they benefit the lender?
Mortgage brokers make their money in two ways:
1. They charge you a fee up front
2. They give you a higher interest rate so they get paid by the bank.
Whenever the points are negative the bank pays the mortgage broker those points.
So in this example if the lender gives you your loan at 6.25% with two points they are making you pay 2% to them and they are even with the bank (don't pay, don't get).
However, if they give you the loan at 7%, no points they are getting nothing from you but the same 2% from the bank this time. The bank does this because they easily make that money back with the higher interst rate.
In one more example they can loan you the money at 5.875% with 3 points. From this they collect 2% from you and the other 1% goes to the bank.
As you might have caught on mortgage brokers make an average of 2% on each transaction.
Lets use a $100,000 loan for simplistic purposes.
Lenders give mortgage brokers a matrix showing the points and interest rates.
It might look something like this:
Rate / Points
5.875 / 1
6.000 / 1.5
6.250 / 0
6.500 / -.5
6.750 / -1.5
7.000 / -2
7.500 / -3
8.000 / -3.5
Mortgage brokers make their money in two ways:
1. They charge you a fee up front
2. They give you a higher interest rate so they get paid by the bank.
Whenever the points are negative the bank pays the mortgage broker those points.
So in this example if the lender gives you your loan at 6.25% with two points they are making you pay 2% to them and they are even with the bank (don't pay, don't get).
However, if they give you the loan at 7%, no points they are getting nothing from you but the same 2% from the bank this time. The bank does this because they easily make that money back with the higher interst rate.
In one more example they can loan you the money at 5.875% with 3 points. From this they collect 2% from you and the other 1% goes to the bank.
As you might have caught on mortgage brokers make an average of 2% on each transaction.
thanks