My name’s Evan Kaufman, your VA loan originator. Here to help explain something within the video that we’ve had before called how lenders charge you. Remember, lenders charge you three different ways: typically through the interest rate, through lender-paid closing costs, and through mortgage points (finance points).

That’s a charge that you pay upfront to effectively lower your interest rate. We’re going to talk about those finance points right now.

So, finance points are you paying some money upfront to receive a lower interest rate.

Now, typically what we’re talking about are called permanent finance points, which means you pay some money upfront, and you lower your rate for the life of your loan.

For finance points, how those work is that at closing, you would pay, say it’s a $500,000 loan that you have, right? It’s all based on loan value. One point would equal 1% of the loan value.

So, at closing, if it was a $500,000 loan, you’d have to bring $5,000 at closing to get whatever that would correspond to as a lower interest rate.

Sometimes folks assume that, ‘Oh, I’m paying 1%, my rate lowers by 1%’ — not the case.

Typically, industry standard you’ll hear is: pay 1% for a point, lower your interest rate by a quarter of a percent. Meaning that if you were at, say, a 6% interest rate, it’d go to a 5.75% interest rate for paying 1% upfront.

Reality, though, depending on the lender you’re working with, that could vary.

Like for us, we really don’t mark up our points. So ultimately, we’re passing that through.

Sometimes it’s a quarter-point benefit or quarter percent benefit on the rate.

Sometimes it’s big; it could be a full percentage point.

We’ve seen before, even pay one percentage point upfront, drop your rate by a full percentage point — pretty wild.

So, know that finance points are you paying money upfront to get a lower interest rate.

But you’ve got to do the analysis to see if they’re really worthwhile.

And the issue that I personally have a lot right now is that folks are pushing points, a lot of lenders are, and people are assuming they have to do them because it makes the interest rate sound better.

But it might not actually be a better deal.

So, what you have to do with finance points is something called the payback period.

You’ve got to take the monthly savings that those finance points could bring you and divide it into the cost of those finance points.

For example, let’s say it was a $500,000 loan and you’re going to purchase one point.

And so that would be $5,000, and it was going to save you $100 a month on your interest rate.

So, what is a payback period? Is this worthwhile?

Well, what we would do is we’d take that $100 and divide it into that $5,000 cost that you had.

That would equate to a 50-month payback period.

Another way to look at that math is 50 months of a $100 savings equals $5,000, which is how much that cost you.

Meaning that after those 50 months, you’re coming out ahead – every month thereafter, is that a good deal?

I’d personally argue 50 months is a little long, and we see that on a lot of finance points opportunities.

We see it being between 40 and 60; that’s kind of your traditional standard that you’ll see.

And that’s why, me personally, I’m not a huge fan of points unless it really makes sense.

When it makes sense is when you really see that payback period getting lower.

I would argue, especially for military families who might only own their home or know that they’re going to refinance soon within the next 3 to 4 years, you want to see that payback period closer to 24 months and ideally even less – 24 to 36, that’s where it’s a gray zone.

Like, ‘Hey, you may or may not sell or refinance within that period, so it could be okay.’

But you also got to factor in time value money.

I would argue 24 to 36, may be / may not be worth it.

If you’re going to own the home forever and you don’t think interest rates are going to go down again, okay, could be worthwhile.

But if not, you want to make sure that payback period is ideally like 24-month period or under.

So, in that example of paying $5,000 for the point upfront, how much does that need to lower my monthly payment?

In that scenario, you’d ideally see like a $250 to $300 a month decrease for that $5,000.

That all of a sudden is equating to around a 20-month payback period, which would make sense.

Your lender should be able to do that calculation for you.

So, they’re saying,

 You go, ‘Well, what’s the payback period on that versus a no-point option?’

Meaning, paying no money to bring down that interest rate.

And that’s what you have to discuss.

Now, we can also do partial points, and that’s where sometimes we see some value – not a full point, meaning paying a full 1%.

And some people even try to charge 2%. You usually see the diminishing returns on those by far.

I got asked once by a smart borrower, ‘Hey, Evan, can I just pay my rate down to zero or pay my rate down back to 2%?’

I’m like, ‘No, there are diminishing returns.’

So, at some point, once you’re beyond that really, usually two options, the returns are really not worth it at all. Your rate barely moves for paying more money to bring it down. Doesn’t make sense.

But in the partial point world, especially recently, we really can see some opportunities that could be like, ‘Pay a quarter of a point.’

So, in that $500,000 scenario, you wouldn’t pay $5,000; you only pay a quarter of that. And do that math quickly on the mind, it’s like $1,250, right?

And sometimes we see there really big benefits on how much it can reduce your monthly payment.

So those are finance points. I hope that explains it a little bit more.

Please feel free to reach out and ask any questions. My name is Evan Kaufman, again, your VA originator. Take care.