Get Used to Paying Points

[Michelle England]

Until recently, borrowers could obtain loans with no points and in some circumstances could avoid paying closing costs too (Escrow, Title, Appraisal, etc). This was possible because lenders would allow borrowers to accept a slightly higher interest rate and in return would pay the loan originator a fee called a Yield Spread Premium that the originator could use to pay the borrowers closing costs. This was the basis for the "No-Cost Refinance". A point, or 1% of the loan amount, would equate to approximately a .25% in the interest rate.
Recently, lenders have reduced the Yield Spread Premiums (SP) offered to originators. In order to obtain the best rates, borrowers have to pay points or some fraction of a point. This eliminates the possibility of a No-Cost Refinance and even a No-Closing Cost Purchase transaction. At the same time they have reduced the YSP, they have widened the interest rate spread between a loan with no points vs. a loan with points. For example, if a borrower wanted a no-point loan the rate may be as high as 5% or 6%. But, if the borrower was willing to pay a point, the rate may be only 4.750 conforming loan amount. Faced with that large of an interest rate spread between buying a point or not, most borrowers will opt for paying the point. The savings in the form of a lower rate and payment can be payed off fairly rapidly by mortgage payment savings.