Posted on: 15th May, 2009 04:32 pm
We are looking at a possible mortgage with 1 or 2 discount points and were quoted either 5.75 % with 1 discount point or 4.75% with two discount points. The rate without any discount points would be 6.125%.
I have two questions about this:
1. Why is the rate without a discount point so much higher? I was under the impression that 1 discount point usually buys down 0.25% of the rate, but in this case its 0.375%. How come?
2. If we chose to pay a discount point, should the broker also charge a YSP? I understand that this happens and one needs to watch out for this. It would be non-sensical since we would be paying at both the front and back end.
I have two questions about this:
1. Why is the rate without a discount point so much higher? I was under the impression that 1 discount point usually buys down 0.25% of the rate, but in this case its 0.375%. How come?
2. If we chose to pay a discount point, should the broker also charge a YSP? I understand that this happens and one needs to watch out for this. It would be non-sensical since we would be paying at both the front and back end.
Hi
A discount point is a sort of a pre-paid interest which the borrower pays upfront to reduce the rate. One discount point is expected to drop the rate by 0.25%-0.125%. But various other factors are taken into consideration while rates are reduced or increased. You can ask your broker what's causing this substantial difference in the rates. The lower the interest rate you pay, the lower the yield spread premium would be. As far as I'm aware of, you will have to pay the YSP even if you pay the discount points upfront. If you don't pay, the lender might pay it for you but they'll roll in this cost in the loan, which you'll have to pay over the term of the loan.
A discount point is a sort of a pre-paid interest which the borrower pays upfront to reduce the rate. One discount point is expected to drop the rate by 0.25%-0.125%. But various other factors are taken into consideration while rates are reduced or increased. You can ask your broker what's causing this substantial difference in the rates. The lower the interest rate you pay, the lower the yield spread premium would be. As far as I'm aware of, you will have to pay the YSP even if you pay the discount points upfront. If you don't pay, the lender might pay it for you but they'll roll in this cost in the loan, which you'll have to pay over the term of the loan.
beware of the wording. savior says "if you don't pay, the lender might pay it for you..."
fortunately, savior finished that by saying that you'll pay for it over the term of the loan.
the real terminology is as follows: "you will pay for this one way or the other - either in cash or by folding the amount into the loan."
there is truly no such thing as a free lunch, to quote the old cliche.
fortunately, savior finished that by saying that you'll pay for it over the term of the loan.
the real terminology is as follows: "you will pay for this one way or the other - either in cash or by folding the amount into the loan."
there is truly no such thing as a free lunch, to quote the old cliche.
Good question, but it is all in how the loan officer prices the loan. Some will charge both, typically most will simply have one or the other.
There isn't necessarily a set amount as to how much 1 discount point will buy down your rate. This depends on that days pricing, the loan officer pricing it, and they type of loan that you are looking for.
Provide some more information on your actual costs and situation and we can let you know if it seems reasonable. Without knowing the full situation it is hard to give a solid answer.
Best of luck!
There isn't necessarily a set amount as to how much 1 discount point will buy down your rate. This depends on that days pricing, the loan officer pricing it, and they type of loan that you are looking for.
Provide some more information on your actual costs and situation and we can let you know if it seems reasonable. Without knowing the full situation it is hard to give a solid answer.
Best of luck!