A borrower recently submitted a Loan Estimate from a large national lender for a $485,000 refinance.
The quoted interest rate was 6.875 percent, with $8,240 in discount points required to obtain that rate. The borrower had strong credit, stable income, and more than 40 percent equity in the property.
At first glance the rate did not appear unusual. Many borrowers assume that a rate in the high six percent range reflects normal market pricing. But the Loan Estimate revealed something different when the numbers were examined more closely.
The discount points stood out immediately.
Points are essentially prepaid interest used to lower the rate. In this case the borrower was paying more than 1.7 percent of the loan amount upfront. That raised a simple question.
Why were points necessary at all?
We reconstructed the pricing using wholesale lender rate sheets available to mortgage brokers that same morning. Three lenders were offering the identical borrower profile rates between 6.25 and 6.375 percent with zero points.
This meant the borrower was being asked to pay thousands of dollars to obtain a rate that was already higher than the wholesale market.
After rebuilding the Loan Estimate using wholesale pricing, the structure looked very different.
Original quote:
Rate: 6.875 percent
Discount points: $8,240
Origination charge: $1,995
Rebuilt structure:
Rate: 6.375 percent
Discount points: $0
Origination charge: $995
The monthly payment dropped by approximately $156 per month, and the borrower avoided paying more than $8,000 in upfront points.
The lesson from this case is simple.
Discount points are not always a sign that a borrower is receiving a competitive rate. In many cases they simply compensate for a rate that was already marked up.
The borrower moved forward with the lower structure.