Points

General Real Estate Investing
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Can somebody explain the concept of paying points? :anon

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You can find a variety of rates offered for mortgages by a company based on length of term, program, points, etc. A “point” is just a percentage of your loan value. If you look at the different rates based on points, you’ll see that the more points you pay the lower the rate. Some people call this “buying down” the interest rate. 1 point = 1% of your loan value. For example, 1 point on a $100,000 loan would be $1,000. Let’s say that drops your rate by .25% You may be interested in paying some points for a lower rate if you are buying a place you plan on keeping for many years (either for personal residence or rental). Over time, that .25% lower rate would save you quite a bit of interest. If you are only going to have the loan for a few years because you may resell rather quickly, paying points might be to your disadvantage…the money you pay in points may actually be more than the money you would save in lower interest during those few years. You just have to run the numbers and see what would be beneficial for you. Note the points would be paid at closing so that would be more money you would have to come up with to get the loan.

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Hard Money Lending Points: A HML may charge points up front for a number of reasons. When I was lending hard money, I would charge 2 points up front to NOT check credit on the borrower. For instance, a borrower needs $25K. I charge a normal HM rate of 12% per annum, and require that the borrower fill out a loan ap and let me check their credit score. I’ll add .25% more to the rate for every 50 points below 760 the score goes.

If the borrower does not want me to check credit, they can opt to pay 2 points “up front” to borrow the $25K. So they pay me interest of 12% based on $25K plus 2% (12% per annum on $26K), but I only hand them $25K in cash at close. Hard money may also require points up front if the loan term is short - like 18 months or less, or if borrower prepays.

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Thanks guys! They were both helpful answers to increase my knowledge!