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Mortgage Rate Pricing

A guide to understanding “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.
  1. 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.” Click here to read our full breakdown of closing costs.

Rate Cost

In addition to the “closing costs” mentioned above, every mortgage rate has a “rate cost” associated with it.

  1. The 30-year fixed mortgage, for example, will have a handful of rates available, such as 4.000%, 4.125%, 4.250%, 4.375%, and so on.
  2. Just like for goods in a supermarket, each mortgage rate has a “cost.”
  3. This cost is also expressed as a percentage of the total loan amount.
  4. 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”.

  1. Typically, the lower the rate, the more “expensive” the cost.
  2. Conversely, the higher the rate, the more of a rebate you receive.

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.

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.

 

Written by Central Coast Lending - Go to Central Coast Lending's Website/Profile
805.543.LOAN info@centralcoastlending.com