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Discount Loan Points
A point, is one percentage point, 1%, of the loan amount for example, with 100,000 loan, one would be $1000, six points would be $6,000.
Discount points are used to increase the lenders yield from the loan without raising the interest rate. If the loan is discounted, that is if these components are paid, the lender can charge the borrower and lower interest rate than it would otherwise have to charge in order to meet its minimum yield requirements. The interest rate stated in the promissory note, called the nominal rate or the coupon rate, is less than the affected rate, which is the lenders effective yield from the loan.
For instance, if the loan of where $145,000 and a lender required for discount points, 4%, of the loan ($5,800) will be deducted from the amount actually a defense of the borrower and the remainder of $139, 200, will be delivered to the borrower to finance the purchase. The borrower signed a promissory note and mortgage agreeing to repay the entire sum of $145,000 at the stipulated rate of interest. The lender would advance only $139,200 but would be repaid $145,000. The buyer of the transferred the loan proceeds, $139,200 to the seller with a making of the difference. In effect, the seller would have paid the lender $5,800 to induce the lender to make a loan with a lower interest rate. The $5,800 would have compensated the lender for the lower yielding loan. Example: (this is how brokers view this) Every broker will receive a daily rate sheet from the bank.
Lock determines when you as a borrower will give lender/broker all necessary documents to process the loan. If you are thinking of getting a loan for refinance or purchase, usually broker will lock your rate at 30 day lock period. If you as a first time homebuyer already found a property and need loan fast, 10 day lock period is the best choice for it. Broker will select lock for you, depending how fast broker will receive your documents. The lowest possible rate..if you have excellent credit...is 7.000% on the example above. That means that even broker is charging you loan origination up front..for example 1.000 point, broker will also receive a 0.875 points from the lender or bank. That means that broker will make 1.875 points all together. Sometimes lenders, brokers will promise you no points loans. That means that you will get a higher interest rate because lending institution, such as bank will give points back to the broker. So if your credit is excellent and you qualify for 7.000% and you ask for zero points. You may get rate of 7.500%, because nabk will give broker a points back. Depends how many points brokers charge that much money he/she will make. if you would like interest rate of 6.625%, you will have to buy down this rate. The cost is 1.000 point as mentioned on the example above. If you like to buy down the rate most of the time, broker will charge you a up front points, so broker can make some money on this loan. All discount points are paid through the loan. There are no out of pocket expenses. | ||||||||||||||||||||||||||||||