ORIGINATION POINTS
Points run in increments of .125’s (1/8's).
On a $100,000 loan, .125 of a point is $125 and 1 point is $1,000. Points are not always a bad thing. In fact, points can be very good. It is not as complicated as one would think. You first need to understand the relationship between originatin points and your proposed lender or broker, then understand the relationship between origination points and the holding period of your investment (How long do you intend to keep the home as a residence or for investment purposes).
Background Info:
Secondary Marketing sets pricing for the Correspondents, Lenders and Brokers. Secondary is where all mortgage lenders sell their mortgages in bulk, in the form of fixed term securities. When a lender's loan pools are large enough (they have enough closed loans in their office), they are sold on the open, or secondary markets, as a set, or pool. Some of the larger buyers on the secondary market are FNMA, FHLMC, GMAC, as well as many insurance and investment banking firms. These securities are bought and sold on Wall Street on a daily basis, similar to how stocks are bought & sold on Wall Street.
Now let's talk about pricing on a retail level.
First and foremost, your Loan Officer who works for a bank, mortgage lender or mortgage broker, originates mortgage loans for the public on a "Retail" level. This is the only methos of procuring a mortgage.
The retail office they represent will always have a set revenue amount needed per transaction. On a standard $100,000 loan, $3,000 (or 3%, 3 points) in revenue is common for conventional type loans, $5,000 on sub prime loans, generally more on private or hard money loans, and even more on very time consuming transactions, such as commercial loans.
Let's use an example. You are dealing with a Bank, Mortgage Lender or Mortgage Broker who has a branch revenue requirement of $3,000. A par rate (Buy rate) for a 30yr conventional fixed rate mortgage (FNMA) may be 5.250% through the secondary department or wholesale department (Wholesale is who brokers and correspondents fund their mortgages through) of a Mortgage Lender or Bank. "Par rate" or "buy rate" is the lowest rate available to the broker.
The Mortgage Lender offers their retail branch and/or brokers the following pricing (Pricing changes daily in accordance with the market):
5.250% PAR
5.375% -100.500 Rebate
5.500% -101.000 Rebate
5.625% -101.500 Rebate
5.750% - 102.000% Rebate
5.875% - 102.500% Rebate
6.000% - 102.875% Rebate
6.125% - 103.250% Rebate
The "rebate" percentage is points-based. Thus, 102.500% represents 2.5%, or 2.5 points. This is an amount paid to the broker by the lender at closing.
By offering a 5.250% rate, the originating branch of the bank, mortgage lender, or mortgage broker, will not receive any compensation for doing your loan. That won't work, as there are no Charitable Mortgage Lenders, Banks or Mortgage Brokers in the industry. If you want that 5.250% rate, you will have to pay 3 points (3% of the loan amount) so the originating branch meets their $3,000 branch revenue requirement. These are "origination points."
Examples:
Your Loan Officer may offer you a rate 5.750% with no origination points. With the aforementioned pricing, they will receive 2 points ($2,000) from secondary or through the wholesale department of the mortgage lender.
Your Loan Officer may offer you a rate of 5.500%, which includes a fee of 1% in rebate points. The full $3,000 will still be met. 1% ($1,000) will come from secondary and the other 2% or $2,000 will come from you at closing in the form of origination points.
That’s how the relationship works. $3,000 may seem a bit high to the average consumer, but if you understood the amount or work involved in funding loans and the costs/risks involved in operating a mortgage lending branch or a mortgage brokerage company, $3,000 gross per transaction is on the low side.
Note: Buyers generally pay up to 6 % commissions to Realtors for simply showing a home and writing a contract. Relative to such, $3,000 in gross revenue is certainly on the low side.
Sub prime loans pay very little yield spread premium (Some don’t pay any at all), forcing originating mortgage lending branches and mortgage brokers to charge more origination points, in order to meet their revenue guidelines.
Hard Money Lenders and Private Investors do not pay any yield-spread premium. In fact, many will even charge a point or two (or more) just to fund the loan. This is why you see even more points charged by originating mortgage lending branches and mortgage brokers for these types of transactions.
Now let's talk about the relationship between your holding period and the amount of origination points you should pay. Using the above scenario:
If you borrowed a $100,000.00. A no point loan will give you a rate of 5.750%. Your payment is $583.57. If you elected to pay 2 origination points or ($2,000) to buy down the rate to 5.250%, you would then have a payment of $552.20. That's a difference of approx. $31 per month. You paid $2,000 to buy down your rate by ½ of a percent. Sound good? Maybe.
Divide $2,000 (origination points) by $31.00 and you get a breakeven period of 64.51 months.
Recommendations:
- Someone looking to buy and flip (sell immediately), paying extra origination points for a better rate is a bad choice.
- Someone looking to buy, hold and sell within 2 - 5yrs (Avg. first time home buyer), paying extra origination points for a better rate is again a bad choice.
- Someone looking to buy, hold and sell after 64.51 months should pay the origination points for a better rate, as after the 64th month, your monthly savings is pure net profit to you.
That's how origination points work. Origination points are not a bad thing, provided they are understood and applied correctly to one's Real Estate Buying Objectives.
Next item: The difference between origination points and discount points.
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