We are often asked what a borrower gets when he pays 1 point. A “point” is just a % of the loan amount. 1 point = 1% of the loan amount. Typically, borrowers lower their rate about 1/4% if they pay a point, although it varies depending on how “steep” the yield curve is.
There was a period in 2008 and 2009 when paying a point reduced one’s rate by 1/2%; the yield curve was very steep then.
We typically offer “no points” loans to most of our borrowers for three reasons: (1) to keep closing costs low and to preserve cash; (2) to keep things simple; and (3) to keep within our rule of thumb “pay-back period” guideline. Paying 1% or 1 point to reduce one’s rate 1/4% will require about 4 years of savings to offset the cost of the point. Our rule of thumb is that pay-back periods (for points) should always be less than 4 years.
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