Why Mortgage Lenders Are Requiring Upfront Points

There’s been a recent phenomenon where mortgage lenders are requiring borrowers to pay upfront points when obtaining a home loan.

This runs counter to the typical experience where you can easily acquire a no cost loan with no points or closing costs required.

As to why this is happening, it’s basically because the mortgage market has been so volatile lately.

Simply put, it’s difficult to determine the value of a mortgage loan because it’s unclear where mortgage rates go next.

To mitigate that unknown, many lenders are charging points to ensure some profits are being captured upfront.

Why Do Mortgage Lenders Charge Points?

Mortgage lenders charge points to collect profit upfront as opposed to over time via regular monthly interest payments.

Or to offer lower-than-market interest rates to entice mortgage rate shoppers to go with them instead of someone else.

This money is obtained from the borrower via a loan origination fee or via discount points, the latter being a form of prepaid interest.

Instead of waiting to collect interest each month once the loan is closed, they can collect some money upfront.

In exchange, you should get a lower mortgage rate versus the borrower who doesn’t pay points.

Collecting more now means less has to be paid later (via a higher interest rate) to account for the unknown, such as prepayment.

Of course, many lenders sell their loans to investors shortly after closing, but the same principle applies.

If you opt to pay little or nothing at closing, the lender’s investor will expect a mortgage with a higher rate so they can earn more interest over time.

Either way, you’re paying something, it’s just how you pay. At closing via points or during the loan term via a higher mortgage rate.

How Will Recent Mortgages Perform?

Because mortgage rates have more than doubled in a year’s time, there’s a lot of uncertainty regarding recently-originated home loans.

Will borrowers who got mortgages in 2022 keep them for the long haul, or will they quickly refinance them if/when mortgage rates improve?

Sure, mortgage rates could fall this year, but it wouldn’t be improbable for them to move even higher.

The big worry for lenders and mortgage investors is a scenario where rates improve enough for many of these borrowers to refinance.

A recent stat from Black…

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