Analyzing Discount Points
One of the most misunderstood aspects of the mortgage banking
industry is that of discount points. The confusion is worsened
by being referred to by many different names. "Point", "Discount
Points", "Discount"," Investor Fee",
and "Marketing Fee" are just a few of the names
referring to the same thing. Whatever the name, the definition
is the same.
The primary purpose of "points" is to increase the
yield to the investor of the loan. By collecting "points" the
investor is able to provide below market interest rates to
the borrower. An example would be:
An investor wished to invest $50,000. He has the choice of
investing in money market certificates which yield 13.5% or
a mortgage loan at 12%. The investor would, of course, prefer
the higher yielding money market investment. However, if we
add discount points to the picture and offer the investor a
mortgage loan at 12% with 6 discount points (6% of the mortgage
amount) up front, ,the investor is offered a far more attractive
investment.
Keep these facts in mind:
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Points enable the lender to offer lower interest
rate FHA, VA, and conventional loans to their borrowers. |
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Points help enable the seller to sell, the buyer to buy,
the builder to more easily sell his product and the Realtor
to provide buying clients with an easily accessible means
of home financing. |
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Points fluctuate because the "cost" of borrowing
money goes up and down, depending on supply and demand. |
To sell properties today, we not only need ready, willing,
and able buyers and sellers - we also need to obtain financing.
We can obtain financing because of POINTS. Through the use
of this tool, lenders are able to invest their money in mortgage
loans and realize a rate of return comparable to other investment
opportunities. Thus, it can be said that: Points are the
magic ingredient behind the majority of activity in Real
Estate
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