Taking the points: consumers often pay more for 'no-points' mortgages

Real Estate Weekly, Feb 18, 1998

Consumers are paying thousands in unnecessary home mortgage interest by taking out no-points loans, according to executives from Manhattan-based Skyscraper Mortgage Company, one of the largest mortgage brokerage firms in the nation.

Ironically, many homebuyers are drawn to no points loans by the prospect of saving money. Points, usually paid at closing, are pre-paid interest that lenders collect upfront - each point equals 1 percent of the total loan value, so on a mortgage of $100,000 one point would tee $1,000. In exchange for the points up front, lenders offer a lower interest rate on the loan, each point buying a rate deduction of one-eighth to one-quarter of a percent, depending on the term of the loan.

"No-points mortgages are the hottest mortgage product out there," said Neil Bader, CEO of Skyscraper Mortgage Company. "Mortgage shoppers who choose no-point loans really want to save money. They're dazzled by the lure of avoiding upfront charges - to them the mortgage looks cheaper. The reality is, in the great majority of cases, no-point mortgages end up costing home-buyers significantly more than those with points."

Bader notes that on a loan of $100,00O, a 30-year fixed-rate mortgage at 7.5 percent with two points costs $2,000 up front and results in monthly payments of $699. In contrast, the same loan with no points carries an interest rate of 8 percent and monthly-payments of $733. By the fifth year of the loan, the initial savings of the no-points loan have been eaten up by the higher rate - and by the end of the loan, the borrower has made $6,154 in extra payments.

For adjustable rate loans too, the no-points loan is more expensive. A seven year, adjustable rate loan for $100,000with two points paid up front has an interest rate of 7.25 percent and monthly payments of $682. The same loan with no-points has an interest rate of 7.875 percent and monthly payments of $725. The borrower hits the break-even point at 3.8 years and ends up paying more than an additional $1,600 over the term of the loan.

"No-points mortgages are great at helping people who have cash-flow problems at closing, but it's a concession you'll pay for in the long run," Bader points out. "The single most important question here is `How long will I stay in the mortgage?' The longer you're in a loan, the more it makes sense to take the points."

Why do banks prefer to collect points at closing? It takes almost three years for a lender to recoup the cost of originating the loan. If the hank has the opportunity to cover its costs up front with points, it can offer more attractive rates to the borrower. For this reason, they are actually creating an incentive for people to pay points. That's just the reality of the lending business, Bader says.

Bader admits that the proliferation of mortgage products has contributed to the rise of the mortgage brokerage business. "Every single day we lead mortgage seekers through the complicated process of choosing the right mortgage," he said. "A decade ago about 5 percent of people in the New York metropolitan area used mortgage brokers.

Today, 70 percent do. It's because we can find the best rate from dozens of lenders without costing the borrower a penny more than going directly to the lender. But we also add value. We steer people to the terms and amortization schedules that cost them the least money given their circumstances. That alone is worth many thousands of dollars over the life of a loan."

With more than a half billion dollars in loan volume last year, Manhattan-based Skyscraper Mortgage Company is one of the largest mortgage brokerage firms in the nation. They have offices in Manhattan and Long Island and are licensed to arrange mortgages throughout the tri-state region including Westchester, Connecticut and New Jersey. Skyscraper specializes in all types of residential loans, from the most exclusive Manhattan co-op and condo loans to FHA loans for first-time buyers.