Understanding mortgage pricing: a brief guide to “points”, “par” and “rebate”
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.
Closing Costs
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. Central Coast Lending has one of the lowest charges in the industry (for more on our pricing, call 805.543.LOAN).
- Points refer 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.”
Rate Cost
In addition to the “closing costs” mentioned above, every mortgage rate has a “rate cost” associated with it.
- The 30-year fixed mortgage, for example, will have a handful of rates available, such as 3.000%, 3.125%, 3.250%, 3.375%, and so on.
- Just like for goods in a supermarket, each mortgage rate has a “cost.”
- This cost is also expressed as a percentage of the total loan amount.
- The actual price paid for a mortgage rate varies on a sliding on a scale from “cost” (you pay) to “rebate” (lender pays).
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, this gives us a competitive advantage – it allows us to shop around lenders to find the best rate and term that works for you.
Central Coast Lending will help you find the right mortgage/cost combination for your finances.
Final Payment
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 (info@centralcoastlending.com) for a free, confidential discussion about your finances and mortgage rate pricing.
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Roof Tax Credit
On our recent January 14 Mortgage Matters show, we welcomed Dan O’Hare from GBP&B Public Accountants on the show and we got to talking about tax credits. Below, Dan follows up with a question about a “roof tax credit.”
“The roof tax credit does exist and it falls under the Personal Energy Property Credit rules and is claimed on IRS Form 5695. The credit is limited to 10 percent of the cost up to $500 of metal roofs with appropriate pigmented coatings and asphalt roofs with appropriate cooling granules that meet ENERGY STAR requirements. Note that installation costs do not count towards the cost.”
You can see Dan O’Hare’s profile HERE.
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