What’s The Value Of A Discount Point Today?

Mortgage bankers have become extremely stingy about the yield spread premium they offer, to mortgage brokers or directly to consumers, for accepting a higher rate.  Essentially, yield spread premium is a way for consumers to lower the upfront costs associated with obtaining a mortgage.  Generally speaking, each .25% higher in rate afforded a 1% “rebate” to the consumer.  The formula isn’t linear and it varies with economic conditions but we used to rely on that .25% rate/1% rebate formula, in the past.

Today, that scale looked like this:

RATE                             REBATE

4.750%                           PAR

4.875%                          .375%

5.000%                          .500%

5.125%                          .625%

5.250%                          .875%

5.500%                           1.0

You follow?  In years past, a “par” rate (one that offered no rebate and required a 1% origination fee) was about .25% lower than a “no point” loan (one that paid the originator her fee from the lender).  Today, that spread was three times as much.,,,and I bitched about it on Twitter.  Enter Seattle real estate agent, Ardell Della Loggia.  She said, on Twitter:

ARDELLd @mortgagereport - Bigger news 4 buyers and agents…”break even in 21 months vs. WAS just over 5 years A point is looking like a bargain!”

Ardell was a bit off but she’s a REALTOR not a mortgage lender.  It normally took four years to “recover” the upfront point, the consumer paid.  Today it only takes about 18 months.  Ardell looked at the POSITIVE benefit of this disjointed market rather than the negative implications.  In other words, she recognized that the sub-5% mortgage rates are artificially low and that the 5.5% rate is more in line with the market.

Should you pay that “point”? Of course you should IF…you plan on staying in the home for a year and a half.

Sometimes, it’s all in the way you view things.  Thanks, Ardell.  I should have seen that.

December 24, 2008