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Negative Points

Posted on January 29 By MLP Lending Guide

Mortgage "points," a payment made to the lender upon closing the loan, is fairly common among US mortgages. Each "point" is equal to one percent of the total loan amount, and generally the more points you pay, the lower your interest rate will be (and vice versa: the fewer points you pay, the higher your rate). Another possibility is that of "negative points," in which the lender actually pays you a percentage of the total loan amount upon closing the loan. For example, in a traditional loan of $100,000, you might have a choice between 3 points ($3,000) and a 6.5% rate, or 1 point ($1,000) and a 7% rate. Another choice, however, might be a loan with -2 points and an 8% rate. In this case, the lender would pay the borrower $2,000 in exchange for an even higher interest rate.

The money paid to the borrower through negative points must be used to help compensate for the settlement costs. It cannot be used to cover the down payment or anything else. That being said, if you are considering getting a loan with negative points, you must first analyze and determine what your final settlement costs will be. Once you have verified what they will be, get a loan with negative points equal or lesser to these settlement costs. For example, if your settlement costs will be $3,000, -3 points on a $100,000 loan will cover them perfectly. Any more than those -3 points and you'll just be wasting money.

Keep in mind that the more negative points you get, the higher your interest rate will be. Therefore, a loan with negative points is most valuable to those who do not plan to have the loan for very long, and thus won't have to deal with the high interest rate in the long-term. If you do plan on having a long-term mortgage, it is best to find another option besides negative points, as negative points drive up the interest rate very quickly (for every negative point, the rate may increase by .5%).

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