What are Negative Points On A Mortgage?
Negative mortgage points, also known as rebates or yield spread premiums are portions of your mortgage fees that are paid by the lender, who in turn sets a higher interest rate on the loan. This is sometimes called a no-cost mortgage. One negative point is equal to one percent of the overall home loan.
Negative points are a way for borrowers who are severely tight on cash to finance a home. Since the fees are greatly reduced (depending on how many negative points are given, there is little requirement for cash upfront. The tradeoff is that borrowers will end up paying more for their mortgage in the long run due to the higher interest rate.
How Negative Mortgage Points Work
Contrary to positive points, negative points can increase your interest rate but reduce closing costs. For example:
If you take 1 negative point, your lender could increase your rate by .25% but give you 1% of the loan as credit to help pay it off.
The downside of negative points is even with reduced closing costs you still pay a higher monthly rate. In addition, negative points cannot be used towards a down payment, so borrowers will still need to find the funds to cover that amount.
The Negative Point Process
The lender presents the owner with a package that includes an interest rate and a number of points. The points purchased and the paid interest rate move in different directions. The interest rate increases as the number of points decrease. If using negative points the homeowner will receive a percentage of the overall loan amount from the lender depending on the number of points. The borrower in return pays a percentage more per month in interest per point. 1 point (worth 1% of the total loan amount) is typically worth .25% interest. For example:
The lender offers a $100,000 loan at 7% interest. If a borrower takes out $100,000 loan with -2 points, the lender pays the borrower $2,000 and the interest rate will increase half of a point to 7.5%.
Due to the now increased interest rate, the lender benefits from negative points because they receive higher monthly payments. However, the negative points will benefit a borrower short on cash because they receive money to cover some of the transaction fees from the lender. The money received is not to be used freely by the borrower, rather to be put towards costs associated with processing, evaluating and application fees. You also cannot select a rate/point combination that has negative points in excess of your settlement costs.
Weighing Your Options
Negative points are a great option for those who are not planning on staying in their home for an extended period of time. The higher interest rates associated with negative mortgage rates will not be as bad to a short-term homeowner, because the high payments will not be paid for an extended period of time. The benefit would solely be the lower upfront costs.
Negative points may be better for homeowners who:
Do not have extra savings to pay closing costs
Have a large mortgage with high closing costs
Using this as a starter home
Mortgage points can be a valid solution to some of the most common issues many home buyers face. Whether you opt for standard points or negative points, it is always wise to speak with a mortgage specialist to figure out which option is best for you.