How does loan discount point work?

Question

Dear, BP fellows,

I have been looking for investment property loan info for AL and recently get quoted with 30years interest rate 7.625% with 2.125 discount point. So for a property around 200k 20% down, right off the bat, there is a 5k+ loan discount fee, plus all other fees, that pushes the closing close to almost 10k. That doubled my initial thought. Why there is a discount point? Does it means in order to get rate of 7.625%, I have to pay 2.125% up-front?

Also, if I compare different lenders, if we just compare rate, for the same rate, less point is better, right? which means you pay less in order to have the same rate.

Thanks.

Brittany Minocchi · Answer

Is this for conventional financing or something like a debt service loan? It's not uncommon for conventional financing to require points on investment properties. It also depends on how the lender is structuring your loan. Have you asked them if the buydown is a necessity?

Without going into too much detail and confusing you, I'll just answer your question and say that not all lenders have the same pricing for their rates. Your goal is par pricing, which is as close to not having a cost or credit for a specific rate as you can get. If you'd like to reach out, I'm happy to discuss further. Feel free to connect!

Erik Estrada · Answer

Hey Chad,

How long is the HELOC rate fixed for? Is the plan to pay it off out right after the fixed rate expires? HELOC rates are fixed only for a certain period of time and then adjust on a monthly basis. So if you are looking to have a steady fixed payment every month, this would not be a great option.

If your goal is to simply reduce your closing costs, I would recommend shopping this loan instead. You can find DSCR based options without any discount points in the low 7s.

Caleb Kim · Answer

A discount point is a portion of the interest rate that is paid up front as a fee for getting a loan with a lower rate. In your case, to get a 7.625% rate, you need to pay 2.125% upfront. Comparing lenders based on scores is a common practice. Fewer points mean lower closing costs, which can be more profitable.

Chad C. · Answer

Thank you all for your response. That is very helpful.

That is for30 years conventional financing on a rental. I was just asking for the best rate. My DTI or Credit should be not the problem.

With that rate, another question came to my head is, what about using HELOC off primary? It appears we can still find HELOC for amount 200k at around 7.625% without closing fee what so ever. (Or does it exist?) Assuming right now the interest rate overall is around top, would using HELOC be a better option?

Derek Brickley · Answer

Brittany is 100% right.  "Par" pricing would be your interest rate without paying points, however in today's market with a conventional investment loan we aren't seeing par pricing.  Now you may be able to find options with less points, but the only way you may be able to avoid those is by going with a DSCR option.  These will have a higher rate, but since it isn't under the same guidelines as conventional you may find par (or closer to par) pricing on that.  If possible, conventional might still be the best route but it would depend on your goals!

Corby Goade · Answer

This is where lending gets tricky, and most lenders want you to be confused.

You don't HAVE to buy points, but if you have a high DTI, the lender might not be able to do the deal unless you do, we can't tell from the information that you've provided here.

If you have a low DTI, sometimes lenders will just add points to your quote to make the rate look more attractive and hope that you don't notice the buy down.

I'm not a fan of shopping lenders solely based on pricing because service is VITAL with lenders. However, you need to understand the process and what products are available to you, so meet with several and ask lots of questions.

Best of luck!

Ko Kashiwagi · Answer

Hi Chad,

Did you request to see the quote at that specific rate of 7.625%? And was this for a conventional financing? Typically, a lender would present the option with no points unless the borrower asked to pay down the rate. Otherwise, it's because the lender is quoting a conventional program and the highest rate your lender was able to quote was 7.625% with points. And yes if you are able to secure the same rates with less or no points, that is obviously a better deal.

How does loan discount point work?

Most Popular Reply

Contact Us