Points are calculated in the costs of the loan and they are based on 1% of
the loan amount. For example: 2 points on a $100,000 loan
is $2,000. Points are paid to the loan originator, as commission, or to the
lender to obtain a better rate or term depending on the lender's guidelines.
What about Zero-Point/Zero-Fee Loans?
Thousands of homeowners have refinanced with a zero-point/zero-fee loan. This works
by using rebate pricing, or a
yield-spread. Basically, there is no such thing, because you pay a higher rate
so that the lender puts "cash up front". That "cash up front" is used to pay the closing costs of your loan. You pay a higher monthly
payment, so the Zero-Point/Zero-Fee loan costs comes from your future
payments. Simply put, the lender is paying your costs up front, and collecting
them back from you later.
When you hear a mortgage company promoting Zero-Points/Zero-Fee Loans, it
is important to remember that you are still paying the costs of your loan, pay
now, or pay later, it is your decision.
Are Zero-Point/Zero-Fee Loans a bad idea?
You have no immediate costs, so if
the rates drop even slightly, you could refinance again sooner rather than
later. Zero-Points/Zero-Fee Loans can be a good idea if you want the
flexibility to refinance soon if you choose an adjustable rate loan.
Remember that you will be paying a higher rate than you would if you had paid
points and closing costs, and you may incur a pre-payment penalty if you
refinance, or sell too soon. If you are planning to stay in your home for a
long period of time, it may not be your best option, on the other hand, of you
are planning to sell with 2-3 years, it may be a good idea.
The best idea is to contact your mortgage professional to find out if a
Zero-Points/Zero-Fee Loan fits into your financial plan.