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The following is a contribution I'd made to a mortgage web site back in the day when I was a finance guru!! In it, I reference the absurdity of a 6% interest rate on a 30 year fixed mortgage. This article was written in early 2001, before rates took a dive down to levels not seen since the 1960's. I had fun digging this one up!!

"What's the point?"

By Rob Bruening --- Senior Mortgage Consultant with UFT Mortgage, Inc.

The dreaded and mysterious mortgage point. What is it? Why is it there? Do you have to pay it? Let me begin to answer these critical questions with the basics. As most people know, a point (also known as a loan origination fee) is equal to 1% of the loan amount, be it a $50,000.00 loan ($500.00) or a $450,000.00 ($4,500.00) loan. This is one case where size truly doesn't matter!

The reason borrowers are charged this fee is because typically, this is what the lender is going to make on the transaction. Usually when you are paying an origination fee, the rate they are giving you is what we call a "PAR" rate. Lenders can make money by charging a rate higher than then "PAR" rate or by charging point(s). Each 1/8 in rate that the lender adjusts the "PAR" rate, equates to more income (if they pass on a higher rate to you) or less income (if they give you a lower rate) that they are paid on that loan from the institution where they will place your loan. You see, they have to pay for your money before you do.

A mortgage is a product and the rate associated with that mortgage determines the cost of that product. You can pay 4 points and get an extremely low rate. And that, my friend, is probably how your smart-ass neighbor got his 6%, 30 year fixed mortgage he keeps rubbing your nose in. Shortly, I will address whether paying point(s)( makes sense. Conversely, you do not have to pay the origination fee if you don't want to. This is good news to many of you, I hope!

Now, will you get the same interest rate you would have gotten had you paid the point? Sadly, no. That would be quite a trick. You can usually expect to get an interest rate 1/4% higher if you don't pay the origination fee. Remember this rule of thumb, every point you pay buys the rate down by 1/4% (from the PAR) until you get beyond the 4 point range, then it starts to work against you.

OK, so you know the what, why and whether you need to…… Now the question is SHOULD YOU?

This is strictly a matter of choice. The advantages of paying points are the tax deductibility feature and a lower payment. On a purchase, you can deduct the entire amount of the origination fee as prepaid interest. Paying points on a refinance follows a different set of rules. You have to ammortize the write off over 7 years. Also, you need to consider how long you are actually going to be in the property before you pay points on a refinance. The most obvious reason for paying points is because of the lower payment resulting from the lower rate.... A no brainer.

Until the weakening of the stock market, I had always advised folks "NOT" to pay points. I would rather have my money working hard for me in my mutual funds rather than save a few dollars per month on my payment. Given the current wobbly market, I have softened my stance on paying points. Rates are low enough now that you could pay a few points and probably get a rate that you will never have to consider refinancing. That is a comforting thought to some.

However, most investors like to minimize the outlay of cash and in this case, eliminating the point will accomplish just that. Keep in mind you can always get a seller's contribution to help pay for your closing costs and/or origination fee. Even if they pay it for you... you can still deduct it on your taxes!!

Hope this helps….. Go get em!!

Rob Bruening

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