In shopping for the best rate and lowest closing costs on a mortgage, the idea of low to no-cost loans capture the attention of even the most skeptical of borrowers. Advertisements abound with promises of no points and there is a lot of advice out there encouraging people to pay as little as possible toward points when financing real estate. Unfortunately, the prevalence of all this “no points” talk has many people on a wild goose chase, spending more time and money than necessary in search of the best deal.
First Of All, What Are Points?
If you’ve read through the glossary, you may have come across the definition of Points. What you may have noticed is that the only real definition of a Point is a percentage of the total loan amount. The term points doesn’t necessarily mean closing costs, or rebate, or discount costs. Rather, quite literally, 1 point is equal to one percent of the loan amount. The problem with the idea of “paying points,” is that the phrase means, literally, “paying a percentage of the loan amount.”
What’s Really Wrong With The Promise of “No Points?”
The problem lies in the fact that “Points” is not the same as “Closing Costs,” something a lot of mortgage shoppers would be surprised to learn. So, promises of a refinance with no points makes great advertising and generates phone calls, but it does not mean there are no closing costs. It’s not what the promise of no points does say, but what that promise doesn’t say that makes this a form of bait and switch. The promise of no points says you won’t pay a percentage of the loan amount in closing…great, but it doesn’t say you won’t pay any up front closing costs, it also doesn’t say that your lender or broker can’t give you a higher interest rate and make you pay closing costs indirectly.
Understanding The Bigger Picture
When shopping for the best mortgage terms available, the focus should be on interest rate and total closing costs instead of terms like points, which may very well be so emphasized these days as nothing more than a marketing ploy. Mortgage companies understand that the average consumer doesn’t understand the details of a mortgage transaction well enough to recognize such ploys. An adequate understanding of the details of a mortgage transaction is essential if one expects to really find the best deal.