Points

A point equals 1 percent of a mortgage (Example: On a $250,000 mortgage, a point is worth $2,500). Lenders sometimes charge "origination points" to cover expenses of making a loan. Also, borrowers sometimes pay "discount points" to reduce the loan's interest rate.

Points are closely intertwined with the way that loan officers earn their commission, and this can be confusing. Loan officers are typically paid by the lender, and the lender pays for this by charging a higher interest rate. Of course, the borrower could elect to pay the loan officer's commission, or part of it, and the interest rate would be lowered accordingly. This is commonly referred to as "buying down" the interest rate.

One apparent pitfall of this system is that loan officers can earn a higher commission by selling loans with a higher interest rate. This is euphamistically called a 'yield-spread premium', and by itself it is perfectly legal and ethical, as long as no deception is involved. After all, loan commissions are negotiable and, depending on the rules of the firm, loan officers are generally free to set their commissions at a rate that they believe is fair.

Thus, in most typical situations, loan officers expect to be paid a certain amount for their services, either by the lender or the customer, and so they are usually not willing to lower their commission simply to get a lower interest rate for the customer. This makes perfect sense, since the customer is the one who benefits from the lower rate, so the customer should pay for it, not the loan officer.

It is possible to shop around with different loan officers to find out who is willing to lower their commission the most. If you want to find an inexperienced or desparate loan officer, this is one of the best ways I know to do it. If you want to get a good rate, though, it's better just to ask around to find out who can get you the best rates.

Related Links

• Get Prequalified
• Discount Point
• Basic Mortgage Questions