There’s been a recent change in the mortgage marketplace, as lenders are now requiring borrowers to pay upfront discount points when obtaining a home loan.
This is much different than in years past, when borrowers could easily qualify for a home loan with no points – and in some cases even receive a lender credit.
To find out more about discount points, please refer to this article…
Why Is This the Case?
Today’s situation has everything to do with volatility in the mortgage market over the last few years.
In essence, it’s very difficult for lenders to determine the value of a mortgage consummated today, because it’s unclear where mortgage rates go next. Lenders need to make sure that they don’t lose money on each loan they originate.
So, to guard against this unknown, nearly all lenders are charging discount points to ensure at least some profits are being captured upfront.
Why Do Mortgage Lenders Charge Points?
Mortgage lenders charge points to collect profit upfront as opposed to over time via regular monthly interest payments.
Instead of waiting to collect interest each month once the loan is closed, they can collect some money upfront.
Lenders use upfront points to manage their risk. By requiring borrowers to pay discount points, lenders can ensure a more predictable profit over the life of the loan.
This can be particularly important when interest rates are expected to rise, as it helps lenders secure a steady income regardless of market fluctuations.
Mortgage investors generally make money from the interest charged on the loans they provide. However, many of the mortgages originated today might be refinanced quickly, all but eliminating their projected revenue stream.
By requiring up-front points, the lender is compensated for the reduced interest income they would have received over the life of the loan.
How Will These New Mortgages Perform for Lenders and Investors?
Because mortgage rates have more than doubled in a short period of time, there’s a great deal of uncertainty regarding recently-originated home loans.
The big concerns for lenders and mortgage investors is a situation where rates improve enough for many of these borrowers to refinance.
Will those borrowers who obtained mortgages in 2022 and 2023 keep them for the long haul, or will they quickly refinance them if/when mortgage rates improve?
Per The Truth About Mortgage’s article, “a recent stat from Black Knight found that at least 10% of 2022 mortgages would become refinance candidates if the 30-year fixed fell to 4.75%”. And many believe that number is low…
So, if these homeowners refinance, their loans no longer earn profitable interest for the investors. In normal times, lenders can sell their loans to investors at a premium, and use the proceeds to cover their commissions and your closing costs (via lender credits).
Currently, however, this is proving difficult because the value of these loans is essentially unknown. Hence, the profit is being taken upfront in the form of discount points.
In Conclusion
Today’s current mortgage rate environment is much more volatile than in years past. This has made it difficult for investors to determine the value of their underlying loans.
This is why many borrowers are seeing multiple mortgage points attached to today’s mortgage rates.
For example, if you’re planning to stay in your home or hold that investment property for a long time and have the upfront funds available, paying points could be a financially sound decision.
On the other hand, if you’re planning to move or refinance in the near future, paying extra upfront points might not provide as much benefit. It’s important to always compare the total costs and potential savings over the life of the loan before making a decision.
Do reach out to me to discuss the options of paying points…and how much!
