“Points” are not something you buy, they’re something you pay. There are two types of points: origination points and discount points.
Origination points are a fee that the lender requires to “originate” a mortgage. This presumably represents costs that the lender incurs simply to process the mortgage. While they could in principle cover this just by increasing the interest rate a little bit, they would lose out if the borrower paid off or refinanced the loan early.
Discount points are additional points paid to “buy down” the interest rate.
Hence the confusion: if you’re talking about origination points, that’s a mandatory fee that virtually all lenders impose, but 1.5 points is on the high side. And if you’re “buying” a reduced interest rate, then that should be optional.
I’m wondering whether you’re dealing with a lender or a loan broker. If you’re dealing with a lender that has an origination fee of 1.5 points, then you should look for a lender with a lower origination fee. If you’re dealing with a loan broker, it could be that he’s padding the origination fee simply to increase his take. Dump his butt and go find a lender on your own.
What follows is my original response, based on the statement that the _seller_ was requiring that 1.5 discount points be paid:
This sounds like a provision of the mortage contingency clause.
The mortgage contingency specifies the”worst” terms of the mortgage that you’re willing to accept. So you might have said that you needed a 4% rate, the seller “countered” by saying you should be willing to pay discount points to get that rate (presumably on top of the standard “origination fee” points).
Your options would be to simply ignore the mortgage contingency (so if you can’t get a mortgage, then you’ll forfeit your deposit) or you could go back to the seller and propose a contingency at a higher rate but without the buydown point requirement.
However, I really think there’s confusion here. It sounds like the seller is saying that, in order to exercise the mortgage contingency, you must agree to accept a mortgage with up to 1.5% in origination points. If the seller is really unhappy with the interest rate you’re asking for, you should just specify a higher interest rate.
The contingency should also indicate how much the mortgage is for. Typically, mortgages on investment properties will require at least a 20% down payment.
Most likely, it is a pricing cap issue.
Conventional loans are sold to Fannie Mae or Freddie Mac, who each use a risk-based pricing model to price loans. Pricing adjustments are tabulated for various risk items, the biggest being for investment properties (occupancy), then LTV’s, FICO’s, etc.
Fannie/Freddie or the investor buy loans and pay the lender a margin called a premium. This is how the mortgage bank is paid, predominantly, gain on sale of the loan. But this premium has a cap.
Often, on deals with a lot of pricing adjustments, such as investment properties, there is not enough premium to go around… to pay the lender, and internal commissions. This shortage ultimately means that the lender MUST charge the borrower points to close the deal. There just isn’t enough left to do it at no points.
They simply cannot increase the rate any further, as they’ve hit the pricing cap. A higher rate would not yield more premium.
0 comments:
Post a Comment