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The rate sheet shows the
interest rate and the "cost" to the loan officer, expressed in "points."
One point is equal to one percent of the loan.
Pricing the Loan
Different rates have
different costs. Higher rates don't cost as much as lower rates.
This is because the lender is going to earn more in interest over
the life of the loan, so it makes sense to charge less.
Conversely, it makes sense to charge more for a lower interest rate,
because the lender will earn less interest over the long term.
Zero points is called
"par" pricing. Numbers in parentheses indicate "premium" or
"rebate" pricing, meaning that instead of having a "cost," money is
actually paid back to the loan officer and the branch for originating a
loan at that rate.
Almost all loan officers are paid on
commission. The amount earned by the loan officer and the branch
is subject to a "split" -- just like real estate agents. Part of
it goes to the loan officer and part goes to the branch. Any fees
that are not part of the points go to the branch (or company) and are
not subject to the split.
Quoting Rates to You
Before quoting you an interest rate,
the loan officer will add on how much he and his branch want to earn.
The branch or company sets a policy on how little that can be (the
minimum amount the loan officer adds on to his cost) but does not want
to overcharge borrowers either (so they set a maximum the loan officer
can charge) Between that minimum and maximum, the loan officer has
a great deal of flexibility.
For example, say the loan officer
decides he and his branch are going to earn one point. When you
call and ask for a rate quote, he will add one point to the cost of the
loan and quote you that rate. According to the rate sheet above,
seven percent will cost you zero points. Six and three-quarters
percent will cost you one point.
In our example, at 7.125% the loan
officer and branch would earn one point and have some money left over.
This could be used to pay some of the fees (processing, documents, etc),
which is how you get a "no fees -no points" mortgage. You just pay
a higher interest rate.
copyright 2002 by Terry
Light and RealEstate ABC |
