One of the most misunderstood parts of the mortgage process is the pricing. In this guide, we attempt to clearly (and quickly) explain how the mortgage pricing works.There are two main types of payments that the borrower will make.
Under new government regulation, loan officers charge a fixed percentage for any loan, which is commonly referred to as “points.” This charge is fixed prior to each loan and the process is very transparent.
1 point refers to the percentage paid by the borrower for the mortgage rate. For example, “1 point” corresponds to a cost of 1% of the total loan amount. For a loan valuing $417,000, this would translate to a $4,170 payment (for 1 point).
The other component of closing costs refers to charges for items like the appraisal, the escrow process, and a handful of other costs. Combined with the payment to the loan officer, this handful of charges amount to your “closing costs.” Click here to read our full breakdown of closing costs.
In addition to the “closing costs” mentioned above, every mortgage rate has a “rate cost” associated with it.
The “rate cost” ranges from paying “points” for the loan, or receiving a “rebate” to go towards paying your closing cost. Sometimes the option is cost-neutral, or “par”.
Rate costs very based on each lender. As a mortgage broker and direct lender, this gives us a competitive advantage – it allows us to shop around lenders to find the best rate and term that works for you.
Once you combine the net “closing cost” and the net “rate cost” you get your final “points” payment for the mortgage closing.
When we write that “rates improve”, we are referring to the “rate cost” (by the lender) that is moving, which is reflected in a lower APR.
Questions? For more information, please don’t hesitate to call (805.543.LOAN) or email us here for a free, confidential discussion about your finances and mortgage rate pricing.
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