Rates and Points Explained
One point is one percent of the loan amount.
Most lenders offer a range rates and points. Rates are usually provided in 0.125% increments each with a corresponding point charge or credit (YSP). Higher rates provide credit points (YSP) and lower rates require increasing points (discount)
Example: On a day when a lender offers 5.00% rate and 0 points, they may also offer 4.00% with a two-point cost and 6.00% with a two-point credit.
- Origination Point: The origination fee is typically one to two percent of the loan amount, which is the lender’s loan fee. The origination fee is paid at closing. FHA and VA limit the Origination to one point.
- Discount Points: Discount point are paid to lower the interest rate (Buy the Rate Down). The rule of thumb is a 0.50% rate reduction for each discount point. The exact amount will vary.
- Rebate Points or Yield Spred Premium (YSP):paid by lenders for an increased rate. Rebate points are most often used to pay closing costs. A $300,000, so called, Zero Cost loan requires about two rebate points which raises the rate approximately one percent. The exact number of rebate points needed for a depends on the loan amount.
Rates can be “Locked” for specific periods of time, usually in 15, 30, 45 or 60 day increments. It is important to choose a lock period that will cover the time required to close the loan. Once the rate is locked it will not change during the lock term.
- Lock Confirmation: Rates can change without notice. It is possible for a lock to be authorized and by the time the authorization reaches the lender’s lock desk rates could have changed. Rates are not locked until the lock is confirmed by the lender.
- Lock Expiration: It is the policy of almost every lender to hold the rate of an expired lock to the original locked rate in down markets and raise the rate to market in up markets.
- Float Downs: Some lenders allow a one-time float down for their locked rates. This allows the borrower to decrease the locked rate when rates drop lower than the locked rate. There is usually a rate premium for the float down option.
Factors That Change Rates
Rates can change several times a day based on current market conditions.
The most watched indicators are the 10-Year Treasury bond and Fannie Mae Mortgage Backed Securities (MBS). MBS has the closest relationship. Both of these are directional indicators and moves of either indicator may not show an exact corresponding mortgage rate change.
In general; bad economic news is good news for mortgage rates
Effect of Changes to Prime Rate and Federal Reserve Rates.
In most cases, the market anticipates these rate changes and rates are already effected in advance of the actual change.
Example: in 2001 Fed Funds were cut eleven times and in every case on the day of the cut mortgage rates increased because the market already anticipated the change.