WHAT ARE DISCOUNT POINTS?
Discount points or "points" are a way of increasing an interest rate or yield so as to be attractive to a lender or investor. A discount point is 1% of the loan amount, paid at closing.
Discount points or "points" are a way of increasing an interest rate or yield so as to be attractive to a lender or investor. A discount point is 1% of the loan amount, paid at closing.
WHY ARE DISCOUNT POINTS NECESSARY?
The U.S. Government, at a lower rate than most conventional lenders were able to obtain, traditionally set the VA and FHA interest rates. It was, therefore, necessary for points to be charged to the seller in order to make the lower rate VA/FHA loan acceptable to the lender.
In addition, when a buyer wants a lower rate or payment on conventional loans, points could be paid to lower his rate, but still give the lender the required yield. (As of December 1983, FHA will no longer set the maximum rate.)
WHAT IS THE VALUE OF EACH DISCOUNT POINT TO A LENDER?
Traditionally each discount point has been worth approximately 1/8th percent increase in the interest yield over the life of the loan. Therefore, it took about 8 discount points paid up front to lower the rate 1% over the life of the loan. Today this formula varies widely from lender to lender. Typically, most lenders today would accept 6 discount points to lower the buyer's rate 1 %. On a fixed rate mortgage some lenders may even accept 4 or 5 points to lower the rate 10;0. Lenders will accept even fewer points to reduce the buyer's interest rate (Sometimes 2 -3 points for each 1% interest reduction.) on the new adjustable rate mortgages, where the payments can be adjusted periodically.
Traditionally each discount point has been worth approximately 1/8th percent increase in the interest yield over the life of the loan. Therefore, it took about 8 discount points paid up front to lower the rate 1% over the life of the loan. Today this formula varies widely from lender to lender. Typically, most lenders today would accept 6 discount points to lower the buyer's rate 1 %. On a fixed rate mortgage some lenders may even accept 4 or 5 points to lower the rate 10;0. Lenders will accept even fewer points to reduce the buyer's interest rate (Sometimes 2 -3 points for each 1% interest reduction.) on the new adjustable rate mortgages, where the payments can be adjusted periodically.
WHY DO POINTS VARY?
Points, along with interest represent the cost of money. That cost is relative to supply and demand as well as competition from other long-term investments.
Points, along with interest represent the cost of money. That cost is relative to supply and demand as well as competition from other long-term investments.
WHO CAN PAY POINTS?
At the time of this writing the VA required the seller to pay any points, but the FHA had gone to a floating interest rate, which allows anyone to pay points, including the buyer. On conventional loans, the seller, buyer, relatives, builders or investors may pay the points. In all probability, the Veterans Ad- ministration will go to a floating interest rate in the near future and eliminate the rule requiring the seller to pay points.
At the time of this writing the VA required the seller to pay any points, but the FHA had gone to a floating interest rate, which allows anyone to pay points, including the buyer. On conventional loans, the seller, buyer, relatives, builders or investors may pay the points. In all probability, the Veterans Ad- ministration will go to a floating interest rate in the near future and eliminate the rule requiring the seller to pay points.
WHY SHOULD THE SELLER PAY POINTS?
With today's double-digit interest rates, the seller may need to provide some incentive to a buyer to purchase his home. This incentive can be a lower interest rate and lower payments for the life of the loan, or a greater decrease for a shorter period of time, whichever appeals to the buyer most. Paying discount points can replace a price reduction and more directly answer the buyer's objection to the monthly payment. Another reason a seller should consider paying discount points (or pro- viding a buy down) is that it increases the number of potential qualified homebuyers by as much as 50%. With more potential homebuyers the home should sell faster with the selling price probably better.
SHOULD AN ALLOWANCE BE MADE FOR POINTS?
With the potential VA and FHA buyers in the marketplace, and conventional buyers looking for lower interest rates, it may be safe to assume that the seller will have to pay some discount points in order to sell his home. If an allowance is to be made for discount points it should be built into the listing price and the appraised value. Once the property is put on the market it is very difficult to raise the price to cover points. If the house sells without points the price could either be reduced or the seller will receive more money than expected.
With the potential VA and FHA buyers in the marketplace, and conventional buyers looking for lower interest rates, it may be safe to assume that the seller will have to pay some discount points in order to sell his home. If an allowance is to be made for discount points it should be built into the listing price and the appraised value. Once the property is put on the market it is very difficult to raise the price to cover points. If the house sells without points the price could either be reduced or the seller will receive more money than expected.
WILL DISCOUNTING HELP INDIVIDUALS SELL OWNER FINANCED MORTGAGES?
Today, it is possible to sell this loan through a lender in the secondary mortgage market.1f the loan was made at a yield or interest rate below the secondary mortgage market rates they will discount the loan proceeds. That is, they would charge discount points to bring the yield up to market rates. Hence, the seller will get his proceeds right away, but minus any discount points necessary to obtain the desired yield. However, the seller in this way can get the majority of his proceeds to use on another purchase.
Today, it is possible to sell this loan through a lender in the secondary mortgage market.1f the loan was made at a yield or interest rate below the secondary mortgage market rates they will discount the loan proceeds. That is, they would charge discount points to bring the yield up to market rates. Hence, the seller will get his proceeds right away, but minus any discount points necessary to obtain the desired yield. However, the seller in this way can get the majority of his proceeds to use on another purchase.
