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What are points and how do they affect mortgages?

04-12-2019About MortgagesEddie Knoell

What are points? Customers are asking about points. Buydown points, buydown rate, how does it work, what is it?

Eddie Knoell: Welcome to the Mortgage Brothers Podcast. I’m Eddie Knoell.

Tom Knoell: And I’m Tom Knoell.

Eddie Knoell: Welcome everyone. It is our sixth podcast. We’re still counting, so hey, it’s six. And I’m excited Tom. We’ve made it to six.

Tom Knoell: We’ve made it to six. Do we have more than six followers, do you think?

Eddie Knoell: I think there are a dozen followers or so in iTunes, and YouTube.

Tom Knoell: Awesome.

Eddie Knoell: It’s growing every day.

Tom Knoell: What do they say, Niagara Falls started with just a drop.

Eddie Knoell: That’s right. So all right. So hopefully we don’t lose any people today, but I think that today’s is an exciting … we’re about exciting, right? And mortgages aren’t exciting.

Tom Knoell: We’re going to take something very technical and boil it down in very human terms. So we are excited about that. Making the unhuman human.

Eddie Knoell: I like it. And so, right to the point here, what are points? Customers are asking about points. Buydown points, buydown rate, how does it work, what is it?

Tom Knoell: Hey Tom, what are your points? What do you guys charge?

Eddie Knoell: Right.

Tom Knoell: Are there points? Points. All we hear are points.

Eddie Knoell: That’s right. I mean any old school borrowers out there who were getting loans especially in the 70s, 80s, even 90s, the points were so common, that it really comes from that generation, I think. The customers are hearing it from their dads, and their moms. You know what I mean?

Tom Knoell: Right.

Eddie Knoell: Make sure to ask that lender how many points they’re charging?

Tom Knoell: Right. How many points are those guys going to make off you?

Eddie Knoell: Yeah.

Tom Knoell: And I think we’re going to cover that at the end, but let’s just at the very, very beginning say the points of the old days are gone. There are very few lenders with very few exceptions to that, but for the most part, any time you talk to the Mortgage Brothers team at Signature Home Loans, we will always basically tell you that points, and we’ll explain what they are, but they really have nothing to do with what the lender makes. Zero.

Tom Knoell: You mind if I just jump into it real quick, Ed?

Eddie Knoell: Yeah, and if you want, I can ask you some of the questions. I know that we didn’t rehearse this necessarily, but we did know what we were going to talk about.

Tom Knoell: Okay.

Eddie Knoell: Start off with, what’s an interest rate?

Tom Knoell: Right. How simple of a question is that. What is an interest rate? It’s simply, what do we say. It’s simply something that is being paid to someone else because you are borrowing money. That’s it. That’s all an interest rate is. And probably 99% of you know that, but just in case, interest rate is just simply paying somebody for something that you’re using of theirs. That’s it.

Tom Knoell: I came up with an example, it’s like using someone’s car. You wouldn’t use their car and give their car back to them, empty with gas or with no compensation, you’d pay them something. Fruit basket, something. So you’re just simply paying someone for a favor that they’ve done. In the case of mortgage, someone’s giving you their money. You’re giving them interest in return.

Eddie Knoell: Yeah, and it’s funny, I don’t know if you’ve had this conversation with your kids, or how many times you have, but whenever I had the opportunity I actually tried to explain to the kids how interest works. And it takes a while. It takes a while for them to understand. But again, it’s as old as humanity.

Tom Knoell: That’s right. It’s probably almost as old as dirt. Old as the cavemen at least.

Eddie Knoell: That’s right.

Tom Knoell: Okay. Next I think we were going to talk about what do interest rates look like? And someone may say boy that was even dumber than the first thing that you brought up. But really the answer in what interest rates look like is really the answer to this podcast. Which is, interest rates look the way they are to keep it simple. So every time Ed and I quote an interest rate, it’s always done on basically what we call an eighth percent increment. Four percent. Four and an eighth. Four and two eighths. I’m sorry, I should say four percent, 4.125, 4.25, 4.375, you’ll never hear us say 4.286754.

Eddie Knoell: Right.

Tom Knoell: Always quote on 1/8 increments.

Eddie Knoell: Now I will say, the audience might see rates out there that are not using those increments, but it’s very rare.

Tom Knoell: Super rare.

Eddie Knoell: In increments of 1/8, that is 99% of all mortgages.

Tom Knoell: Right. And if you go to someone’s house for a cocktail party and they say hey, what’s your interest rate? What’d you get from the Mortgage Brothers team? You’ll never say 4.625821. You’ll say four and a quarter, or we’re at 3.99, or 4.99. That’s really the only time that we deviate from the eighths percent increments is when we get you a .99.

Eddie Knoell: That’s right.

Tom Knoell: So basically, what we were trying to come up with was, how do we describe points. Points are basically, what is the filler, the in between those 1/8 percent increments. The market moves. The market moves one eighths, one sixteenths, one thirty-seconds, one sixty-fourths. How does the market translate that into an interest rate for you? Again, they don’t come back to you and say your interest rate yesterday was 4.125, but today it’s going to be 4.125674. So it’s like a little shock absorber when the market goes up, when the market goes down, there’s either a charge or there is a credit.

Tom Knoell: And I think I came up with the analogy of baking. When you bake, you’re not baking literally to the 1/64th of a cup. Usually it’s what, an eighth of a cup, quarter of a cup.

Eddie Knoell: Measuring cups … you just don’t think about teaspoons in this analogy.

Tom Knoell: Right.

Eddie Knoell: Quarter, half, three quarter, one cup.

Tom Knoell: That’s right. So we quote as if we’re baking. The reality is, this is money. And because money is money, every speck of sugar, every speck of a cent or a half of a cent or a mill of a cent is counted.

Eddie Knoell: That’s right.

Tom Knoell: So it’s not like we’re just bankers or lenders or investors are just going the baking route, which is close enough. No. Everything is measured to the nth degree. Which is where the true definition of points comes from.

Eddie Knoell: And I’ll just say to piggyback on that, that every day and every moment the market is trading. And interest rates don’t go up or down an eighth just like one big clunk of a click, right? Click. They’re up higher, they’re four and quarter. Click. They’re back down at four percent. No, no, they’re moving in tiny percentage points. We call them one basis point. One hundredth of a percent. They’re moving so small that the consumer is never dealing with that. As a consumer, you would only hear lenders speak of rates of course as you said, in the increments. But the banks are watching every small movement.

Tom Knoell: That’s right. And I remember, actually I used to call and I would ask years ago, what are interest rates today? And I always thought that they moved in one eighth increments. So that was another reason why I thought it’d be important for us to cover this topic today. Because I’m a highly intelligent individual. I don’t know about that, but even I thought interest rates literally moved at an eighth of a percent every day.

Tom Knoell: So okay, what else?

Eddie Knoell: So I’m going to set you up then with another question, because I think we need another followup on this. So let’s say the market today is four and a quarter. You didn’t mention about par yet.

Tom Knoell: Why don’t you talk about par. So if Jane were to call you today and she’d say Ed, what are my interest rates today?

Eddie Knoell: Yeah, and let’s just say today they’re 4.25, or four and a quarter. And I said there’s no points. What I mean is, that is at par. The bank is not asking for any premium. There’s nothing, there’s no points to that.

Tom Knoell: Okay.

Eddie Knoell: All right.

Tom Knoell: So zero points. And just to confirm again, points are not what the bank is making. It’s just what that interest rate costs. So if you walked into an interest rate store, and you were to say oh look at that shiny four and a quarter interest rate, what’s that cost? They’d say hey, it’s only 4.25. You don’t have to pay us anything extra for it.

Eddie Knoell: Right. Zero premium, if you just pay the bank four and a quarter, they’ll give it to you.

Tom Knoell: You’ll walk out.

Eddie Knoell: That pretty four and a quarter is all ours.

Tom Knoell: That’s right. Now let’s say you go into the same interest rate store, and it’s the very next day, and Ed let’s say that you say the market just went down a little bit. So the market got better for the borrower. And you walk into that store and you were to see a 4.25% shiny interest rate, what would that mean?

Eddie Knoell: Okay, and if the market got a little better.

Tom Knoell: The market got better.

Eddie Knoell: Okay, so all of a sudden, the bank’s going to say, all right. That four and a quarter, we’ll give it you, plus, we’ll give you a little credit.

Tom Knoell: What?

Eddie Knoell: Yeah, we’re going to give you a 40 dollar credit, because today … well maybe you want to add …

Tom Knoell: No, go.

Eddie Knoell: But basically the market is now … the bank has already calculated the profit they want on the loan. That four and a quarter, they’ll give it to the borrower. It’s improved, but not enough to move it one eighth of a percent, right? Because we go in increments.

Tom Knoell: They’d have to move a very lot, in order for it …

Eddie Knoell: Right. It would have to move a lot. So when it moves a little bit, it improves, we’ll say there’s a lender credit.

Tom Knoell: Mm-hmm (affirmative), okay, good.

Eddie Knoell: Let’s just say it’s forty bucks. And the opposite is true. What if the market deteriorates a little bit, gets a little worse? I could tell the borrower, you’re going to get four … the bank owner’s going to give you this four and a quarter, but they’re going to ask for a premium of about $40 for that today.

Tom Knoell: Right, okay. And let’s say they wait a month, and rates have actually moved quite a bit. So they’ve moved more than an eighth. And they walk in and they say, okay there’s that shiny four and a quarter rate you quoted me, Ed. I want that at par again. And it’s a month later.

Eddie Knoell: And they want 4.125%

Tom Knoell: Or they want the four and a quarter, 4.25, but now let’s say rates are four and a half.

Eddie Knoell: Right.

Tom Knoell: So the borrower calls you, what do you say to them?

Eddie Knoell: Okay, you walk into that store and you say I want the four and a quarter, the bank said hey, we’ll give you the four and a quarter, here it is, but that four and a quarter, in order for the bank to make the same amount of profit as it did for example a month ago … the point is, the value of that four and a quarter has a premium, let’s just say, a whole point. A whole point would be 1% of your loan amount. And if you had a loan amount at 200,000, that would be $2000. So the borrower would pay a premium of $2000 to walk away with that four and a quarter.

Tom Knoell: That’s right.

Eddie Knoell: If the par pricing was four and a half. That’s just an example.

Tom Knoell: That’s right.

Eddie Knoell: And the opposite could be true, what if the borrower says well, I don’t want that, actually I want to pay the least amount of costs possible, I could say well, the bank will give you this shiny 4.75%, four and three quarter, and it will actually give you a $2000 credit towards your closing costs.

Tom Knoell: That’s right. I actually had a borrower today I was working on. It’s an FHA loan, and he’s going into a condo. So there’s about $3500 worth of extra closing costs involved in this deal. And he said Tom, I want your at par pricing, and I also want to know, what interest rate could I get that would generate a credit, enough to help cover those condo costs? And so I figured it out. It was probably about a half percent higher, is what we had to do, to generate enough of a credit.

Tom Knoell: So I think this makes sense for everybody.

Eddie Knoell: Yeah, I think so, and I hope so, if anyone has questions on it, just rewind it, hopefully it helps. And of course just ask us any time, we’re here to help. Also, when you hear commercials, everyone in the audience, when you hear commercials that there’s no closing costs. That’s just a gimmick. All they’re doing is raising the interest rate and giving you that credit we’re talking about.

Tom Knoell: That’s right. That’s a really good point.

Eddie Knoell: Oh yeah, we don’t charge any closing costs. Well, that’s a bunch of baloney. That’s crap. And you’ll hear it in marketing all the time. You’re going to get flyers from it. No closing costs. Free this, free that. Nothing’s for free. The bank knows exactly the profit they want to make, and they’ll just give you that shiny higher rate, with the lender credit that basically pays your costs.

Tom Knoell: That’s right. Anything else we need to cover you think?

Eddie Knoell: I think we’re good. I think we’ve done enough damage today. Enough work is done.

Tom Knoell: There we go. Let’s go home.

Eddie Knoell: Yep, that’s right. See everyone.

Tom Knoell: Okay, thanks guys.

Eddie Knoell: Hey guys, thanks for listening to the Mortgage Brothers show. Please let us know if you have any questions you’d like us to answer on this podcast. You can email your questions. There’s, or yours truly, at And be sure to ask us for a free quote on your next mortgage. Tom and I will personally work with you and help you through the whole process.