Why banks charge you points for a lower interest rate?

Referring back to my previous posting about how banks make money, often times banks sell your loans in the secondary market as soon as it closes in order to make a profit. It works very similar to bonds, you sell it either at a discount or at a premium depending on the current market rate. For example, if the average market interest rate is at 4.5%, and the interest rate on your home loan is at 4.75%, that means your loan has a higher interest rate than average rate in the market. Banks get to sell your loans at a premium. In the contrary, if the interest rate on your loan is at 4.375%, investors will ONLY purchase this loan from banks at a discount. In order for banks to make up for losses, they charge you points to make up the difference.

In the past, loan officers earned huge commission checks if they charged you a lot in points. The government realized that it was an issue in the banking industry. Therefore, they recently changed the law so that loan officers will no longer be compensated by how much points you pay in order to protect consumers. Good news huh? 🙂

6 thoughts on “Why banks charge you points for a lower interest rate?

  1. Toshiko Tami on

    Greetings! I know this is kind of off topic but I was wondering which blog platform are you using for this website? I’m getting sick and tired of WordPress because I’ve had problems with hackers and I’m looking at options for another platform. I would be awesome if you could point me in the direction of a good platform.

    • Underwriter on

      Hi Toshiko! Unfortunately, mine is also from the Worldpress 🙁

  2. Marylee Naes on

    Have you ever considered writing an e-book or guest authoring on other sites? I have a blog based upon on the same topics you discuss and would love to have you share some stories/information. I know my readers would enjoy your work. If you’re even remotely interested, feel free to shoot me an e mail.

    • Underwriter on

      Yes, I am interested 🙂 I will be emailing you as soon as I am free up

  3. online competitions on

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    • Underwriter on

      Thank you so much for the compliment. It really makes my day. It always feels good to be appreciated. 🙂

      Most borrowers are not allowed to have direct contact with mortgage underwriters. And as an underwriter myself, I get frustrated when I see a perfectly good home loan is declined due to the lack of knowledge of the Loan Processors and Loan Officers. They teach borrowers to say or do the wrong thing, and it affects borrowers ability to get a home loan. I was hoping that this website can help a bit. I’m glad u enjoy it.

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