Hello, everyone and welcome back to a new video shawn's. The name and mortgages, are the game today. Now the odds of interest rates staying absolute rock bottom, coveted level lows moving into the future, is probably pretty rare and, as interest rates continue to rise, you're going to see more and more lenders charging more and more discount points to make your rate look better and Also to keep your business, so that's why today i want to break down how discount points specifically work, whether you're, purchasing or refinancing a home with a mortgage, and if you stay till the end of the video, i will show you how i personally save as much Money as possible when i'm getting a home loan, so you'll definitely want to stay for that, but without further ado, let's just jump into it. Okay, so, first of all! Well, you need to hit that like button, but, second of all, you need to know that i'm a mortgage broker, not a mortgage lender, so my goal as a mortgage broker is to save my clients as much money as possible, which means i'm looking at numbers like This every single day trying to figure out what the best scenario is for each individual client, and you can learn more about that on lending.shawnmauku.com.

But discount points in the mortgage industry are probably one of the most heavily misconstrued things, and the main reason being is because big banks and lenders are notorious for charging tons and tons in discount points and basically conditioning consumers to believe that this is normal and a Part of the process - and let me tell you they are not in fact, i see loan estimates like this all the time. Okay and i get a you know, homeowner come to me and they say: hey sean. I started the refinance or the purchase process with this company. Here's the loan estimate they gave me.

Is it good and as crystal clear as i could say it? No, no okay! If you're getting charged three and a half percent of discount points and you've got a ton of junk lender fees in there, that is definitely not a good scenario for you like ever why? Well, i want to actually break down what specifically discount points are, what they do and then also when it does make sense and when it actually does not make sense, which is usually the case. So, first of all, a discount point is not you getting a discount on your mortgage. Okay, no, it's not a buy one get one! It's not! Oh, i'm getting three and a half percent off the normal price of a mortgage. No, when you are paying discount points you, the consumer, the borrower are paying money to get those discount points.

Paying one full discount point means you're paying. One percent of the loan amount to get that specific rate. So if you had a hundred thousand dollar loan - and you were paying 3.5 in points, that means you're paying 3 500 to get whatever rate that lender has on the estimate and the actual specific interest rate is going to vary based on the market and that specific Lender's pricing and the best way to describe this is actually think of this, like a flagpole rates are typically given in increments of 0.125 along the flagpole, however, interest rates fluctuate every second of the day and they can fluctuate by. You know as little as point zero.

Zero one percent, so the odds of you getting a lot interest rate of three percent even at zero costs and discount points is incredibly rare because the market would have to match up perfectly to that rate, which again is incredibly rare, and this is why some discount Points some some discount points are normal during a mortgage transaction. However, the bigger companies like to blow this way out of proportion and go well. You know. Small amounts of discount points is normal in a transaction, so instead of 0.35 percent of discount points, we're going to just move the decimal point over and go 3.5 percent of discount points.

I'm sorry, but that's like thousands of dollars of a difference. You can't you can't just do that, but the reason they do this is to increase the amount of money that company is making overall and i'm gon na get to why in just a little bit. But first i want to give you a real world example. So let's say you're buying a 250 000 home and, let's just say i don't know you're putting 15 000 down.

So that's going to give us a loan amount of 235 000. Now, if you wanted a three percent rate and the market plus that specific lender was currently pricing, that rate at a cost of point two to one percent in discount points, you would be paying 519 dollars in discount points, which is pretty normal and for rate like That super normal super small, it's pretty close to what we call the par price, and this is why i like the flagpole as a good representation of this concept, because rates can go above or below par and par price is basically just the closest rate on the Rate sheet to having zero dollars in discount points, so again it's really hard to get to that zero mark. But you know if you're kind of just right around that zero mark, that's what we call par pricing and what happens when you go above par pricing. Well, now, you're above what the market is currently pricing rates at, so that means you're actually going to get a lender credit.

Now, a lender credit is going to be applied to your closing costs to help lighten the load of how much cash you have to bring to the closing table. So it's essentially a reward from the lender, saying hey if you're willing to take a higher rate than what the market is currently at we're going to give you some money to help you with your closing costs. So then, if we went back to our example and applied this, you know if you're struggling to come up with the money for closing you could do a 3.375 percent interest rate and you get yourself a 2 634 lender credit, and that can be super helpful when You're buying a home, but another reason why i like the flagpole as a reference is when you lock in an interest rate you're, not locking necessarily that rate you're locking in that day's specific pricing. So you know a couple days: go by and maybe you're thinking.

Oh crud, i don't have enough money to actually pay my closing costs and i thought i would hey mr lender: can we go from a three percent rate to a three and a half percent rate, so i can get a big lender. Credit to help me cover that sure. Yes, you can so when you lock in that day's pricing go up or down on that flagpole as much as you want until you get to your funding date. So hopefully, that makes sense and kind of gives you a little bit of an idea of how discount points actually work in the mortgage industry.

Again, it sucks that there's so many lenders who just try to kind of sneak some discount points under the rug, and it ends up being thousands of dollars that so many people don't even notice so um. Hopefully that kind of makes sense. And again, it's hard to understand this even being in the industry. Sometimes i got to double check the math and see.

Okay. Does this actually make sense what's going on here? It also doesn't help that pricing is literally being updated every second of the day, but this begs the question are discount points worth it short answer. No, no they're, not, but the long answer is it kind of depends on your scenario. So i want you to think of a bank or a lender like a casino right.

The casino always wins right. They've got games that you can play and you can statistically increase your odds or decrease your odds by betting on certain things. But at the end of the day, the math and the statistics are always in the casino's favor, because the casino is there to make money not to just give money away like a charity. Same thing applies in the mortgage world.

Okay, the the mortgage lenders are all about math right. All they do is run the statistics on what's going to make them the most amount of money and discount points are a prime example of how they increase their margins because they're betting against the odds, they're betting. Against you, they're going to give you that super low interest rate and say hey we're instead of a three percent rate, we'll give you a two and a half percent rate, but you're going to have to spend 10 grand to get that well, they're, betting on the Fact that you're not going to get the savings out of those discount points in your monthly payment before you actually sell your home all right, real world example time: okay, let's say you're going to pay a discount point. It's going to cost you 700 to pay! That point, and that 700 is going to be saving you 10 a month on your mortgage payment.

That's great right, well kind of that means you need to make 70 mortgage payments before you actually break even 70 mortgage payments is about six years of making payments, and mortgage lenders know that the average homeowner is going to be in a specific home loan from anywhere From four to six years, so they're betting on the fact that you're gon na essentially sell your home or refinance that home loan before you actually get your savings out of it. So the odds of you actually beating them at their own game are not that great. But definitely not out of your control, it's 100 in your control, which is why i like this better than a casino, because a casino there's, no 100 percent guarantee in any game. But in mortgages there is a 100 percent guarantee.

If you are in that mortgage for longer than x amount of months, you will 100 make those discount points worth it and essentially beat the house at their own gain again. It's just super rare for people to actually do that, because life comes at you fast and you're not going to be sitting there going well shoot. I can't sell my home or refinance because i need to make four more payments, so i can break. Even so.

I beat the bank, no, no one says that no one says that, and some people might even want the the lower monthly payment each month because it increases their cash flow, allows them to live a better life. So maybe they spent that money up front. Maybe it makes sense for him in the long run, whatever that's why it's ultimately up to you and your scenario to figure out if it makes sense for you. But this is also why big banks and big lenders will charge you so much money and discount points, because one they're making their absolutely crappy rates, look decent and then two they're, just betting on the fact that you're gon na be out of that loan quickly.

So they're gon na make more money on their balance sheets, but yeah kind of depends on your scenario. So when it comes to me and when i'm getting my personal mortgages for properties that i'm buying or refinancing the way i save the most money as possible is doing a couple things. First of all, it's not talking to a massive bank or lender that's spending. Billions of dollars, with a b, we spent a billion dollars in marketing this year.

Yeah we are they've, got to increase their margin somewhere to make sure that company isn't going underwater they're going to be charging you, the consumer, so always work with a smaller independent mortgage brokerage right, a smaller company, a smaller overhead, don't have to make as much money Per loan gon na pass those savings on you and ultimately they don't have a big brand, that's kind of backing them and marketing for them. So they need to do you a really good job and save you a ton of money, so you can refer them more business. That's the first thing i always focus on. Secondly, you need to be pricing your mortgages or going for your interest rates as close to the par price as possible and here's.

Why, instead of paying those discount points, if you lock your rate in at par and it's not costing you any money at all, great you've got market pricing and if rates drop and go down, you could always refinance to a lower rate at that market's pricing and Essentially, paid no money and discount points for either so there's no break even points that you have to stay in that loan long enough for it to make sense financially, if rates go up great you locked in your rate, it doesn't even matter you spent zero dollars On that rate and you're locked in and you're good to go so it's kind of a win-win and even when i'm planning on holding a property for 30 40 50 years. Basically, until i die, i'm still not paying the discount points, because i know well, if rates go down, i could just refinance and i'm fine and those are really the two main reasons you kind of want to focus on price, your loans, as closest to par as Possible unless you've got a specific scenario and work with an independent mortgage broker, discount points are generally a losing bet for you and that's generally how discount points work. So i think that's kind of all. I want to talk about in this video um.

If i didn't talk about something that maybe you have a question on when it comes to discount points, please leave them in the comments down below i'd love to see what kind of questions you might have on them. Again, i tried to cover as much as i possibly could, but i know it's kind of a challenging concept to understand. So please leave me a comment uh down there, but if you did enjoy this or you did learn something new about how discount points work, definitely hit that like button and definitely hit that subscribe button, because i'm always releasing true and honest information. It's up to you to apply it to your scenario and make sure you're making the best decision for yourself, but otherwise i hope you enjoyed the video and i will see you in the next one.

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