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Points

The one thing lenders want to keep secret is how loans are priced. We’ve all heard about points and origination fees, but who out there has heard about rebates and SRP’s? You won’t have heard of them, unless you’re in the mortgage business.

A point calculated at 1% of the loan amount. The same goes for the loan origination fee. Both of these fees are what we’ll call the “cost of the interest rate.” On any given day, there are many different loan products available. Each of those products has many different interest rates to choose from. Some people think that there is just one interest rate. Not so! The reason for the confusion is because most lenders just “give” their borrower a rate and never show them any alternatives.

Like a share of stock, the price of each interest rate rises and falls from one day to the next. In a volatile market, the price might even change during the course of one business day.

Let’s say that for the loan you’re considering, there are 13 different interest rates listed on the lender’s rate sheet. (Their price list.) The lower the interest rate, the more it costs. The higher the rate, the less it costs. Just like when you’re shopping for a car, you expect to pay more for a Rolls Royce than for a Mercedes. And you’d pay more for the Mercedes than you would for a Chevy, and more for a Chevy than for a used Yugo! (Remember those?) Naturally, the higher interest rates are not as desirable, so they cost less. The lower the rate, the more desirable it is and therefore, the more expensive.

Imagine that on the rate sheet you’re looking at, the lowest interest rate is 5% with a cost of 3 points. That means that the bank would charge the lender 3 points for the loan. Naturally, the lender has to pass that cost onto the borrower. A 5.25% might only be 2.75 points and a 5.5% might cost 2.25 points. A 5.75% rates might be 1.75 points, and a 6% might be only 1 point. See how as the rate increased, the cost decreased? Above 6%, you might see a rate of 6.25% with a cost of 0 points. (zero) That is what is called “par.”

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