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Getting Points on the Back
Also known as "yield-spread fees", points on the back are one of the ways a loan officer makes more funds available to the total loan "kitty." It is essentially a "kick-back" from the mortgage bank the loan officer is buying the loan from, earned by selling a customer a loan at an interest rate that is above the going rate.
Each day, loan officers receive rates from banks for all of their loan programs. Listed for each program is the "par interest rate." The par interest rate is the interest rate at which the broker does not have to pay a fee to "buy" the loan and then sell it to you, nor does he receive a commission for selling you the loan at this rate. You might say that the par rate is "loan equilibrium." Table 3 shows an example of the types of rates a bank might publish to their subscribing mortgage companies every day.
EXAMPLE RATE SHEET ON A 30-YEAR LOAN
| 6.5 | 6.75 | 7.0 | 7.25 | 7.5 | |
|---|---|---|---|---|---|
| 15-day Lock | .50 | .25 | 0.00 | (.5) | (1.5) |
| 30-day Lock | .75 | .50 | .25 | 0.00 | (.25) |
| 45-day Lock | 1.50 | .75 | .50 | .25 | 0.00 |
| 60-day Lock | 2.50 | 1.00 | .75 | .50 | .25 |
In the above example, the "par" value for a 15-day lock is 7.0%. The numbers in parentheses are the points returned to the loan proceeds as additional funds to offset the costs of the loan (or as a commission for loan officer). Why would anyone knowingly pay this higher rate? To get a "no-cost loan," which I will talk about next.
For example, if you wanted a $150,000.00 loan, but didn't have enough to cover the loan costs, you could bump up your interest rate to 7.5%, giving you: $150,000.00 x 1.5%/100 = $2,250.00.
This money will be credited to the loan proceeds at closing. What does this mean? It means that if your closing costs are $2,250.00, you won't have to lay out a dime to do the loan. Keep in mind, though, that if you are purchasing a home, you can't just up the interest rate to get your down payment. You must have enough money for the down payment.
And if you didn't know that the rate you were getting was higher than the par rate (meaning you paid full loan costs)? The loan officer gets that $2,250.00. Do some loan officers "forget" to tell you about this little loan surplus? Unfortunately, yes; it is one of the most profitable methods used by loan officers.
No-cost Loans
You've heard of those no-cost refinance loans? Forget it. There is no such thing. A broker must make money on every loan. Many well-intentioned loan officers honestly believe they are giving you a loan for free, but this simply is not the case.
In the example above, I showed you how you could get a loan at an interest rate above the par rate and get points on the back. The points on the back translate to extra funds available to pay the cost of the loan plus pay the loan officer a commission. So what's wrong with this? Nothing, but you are financing the "free cost" of the loan over the term of the loan (usually 30 years), which can double or triple the closing costs (by way of additional interest) as compared to pay the closing costs in cash.
How Do You Know if the Loan Officer is Jacking up Your Interest Rate?
It bears repeating that it is the loan officer who picks the interest rate he is going to sell you and, consequently, the commissions he will earn on the loan. If he is competing with another loan company to get your loan, he may not be greedy and not jack up the rate. But if you don't shop around, don't trust him to be honest. Some loan officers are completely up-front with you, but some aren't. Always shop around, especially if you have "A" credit. Some loan officers will charge you less if they know your loan will be a piece of cake to put through the system.
Take extra caution if you have less than stellar credit and must get a non-conforming loan, as these are typically the biggest target of shady loan officers. Desperate people have been known to have swallowed higher interest rates and 5 points in fees. This definitely is gouging.
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