Should you pay points? What are points? Is that money going directly into the Loan Officers pocket? Well, that depends. This article will look at these questions as well as a few others to see which strategy makes the most sense in the long run. Well also look at the math to calculate when points make sense and when they dont.
Lets start with the definition. A point is 1% of the loan balance. So if youre getting a $500K loan, one point is $5000. The standard closing cost structure will include one point. In fact, the first point is referred to as origination. The origination is the fee to originate the loan. So that first 1% goes directly to the Broker. And depending on your Loan Officers volume, he or she will get some percentage of that money.
The remaining portion pays for the lights, the office space, the furniture, photocopier and so on. Part of that money goes to the Loan Officer and the rest pays for the office. That explains the origination. Anything beyond that is referred to as points and points are actually prepaid interest; money that goes directly to the Lender. And in exchange for that prepaid interest, the Lender offers a lower interest rate,...
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