Why Do We Quote Rates With Points – When We Dislike Points?
On Tuesdays, we send out an email to our entire database that says “What’s Going On With Rates?”
And – in that email, we share numerous rate quotes – and several are quoted at the cost of 1/2 point.
In response to that email though, an agent we have known for years asked me why we quote loans with points when I have blogged repeatedly about not paying points.
Reminder: “points” or “origination fees” are typically expressed as a % of the loan amount (1 point = 1% of the loan) and are used to buy down the rate in most cases.
We quote loans with points because our competitors quote loans with points – particularly on the more popular rate comparison websites that are set up to generate leads.
The lenders on those sites often quote rates that cost as much as two points too – in an effort to make their rates seem as low as possible at first glance for borrowers surfing the web.
And – it is that first glance that often reels in borrowers before they read the fine print.
Borrowers will often stick with the low rate (but high fee) lender too – even after they see the fine print and realize the quote was not a good deal because the fees are so high.
Borrowers stick with these high fee lenders because the loan officers are skilled at keeping them reeled in and because borrowers don’t want to go the trouble of getting approved all over again.
Hence, in an effort to make sure our rates appear as competitive as possible to web-surfing borrowers, we sometimes quote rates in our emails with a small amount of points (often only about 1/2 point).
We also play the “two point” game on our website occasionally too in order to make sure our featured rates appear competitive relative to other lenders playing the same game.
When borrowers come to us though we explain our fees very clearly and also explain why we discourage the paying of points.
Why We Discourage Points
We discourage paying points in most cases for the following reasons: (1) most borrowers don’t keep their loans long enough to justify the cost of the points – where the savings from lower rate and payment offset the cost of the points. (2) points often don’t buy the rate down enough to justify the cost in any case.
Points make sense if rates are likely to continue to climb and remain high for many years, and if the points are able to buy down the rate significantly.
I remember periods of time years ago where 1 point would buy the rate down as much as 1/2 percent (a bargain), but today 1 point typically only lowers the rate by about 1/4 percent.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167