What's The Points?
The mistake most people make, if they have any sort of idea at all, is to assume that a “point” is some sort of fee. This could not be farther from the truth. The term “points” is simply mortgage industry jargon for percentage points. A percentage by itself cannot be a fee, because fees are paid in exchange for some sort of service. A percentage is a part of a larger whole; it is an equation. As it relates to mortgages, therefore, “points” are a means of calculating the dollar amount of a given fee, not fees in and of themselves. As a matter of fact, points will be used to determine the amounts of at least four different charges associated with a given transaction. But why, you may ask, don’t we just call a duck a duck? Why quote an equation instead of the fee itself? The reason is simple; it’s based upon a sales technique I call “reduction”; wherein a complex, industry speciﬁc pricing structure is “reduced,” via jargon, to terms that are easier for a consumer to think he understands. It’s an embarrassingly obvious ploy once you realize how it works. Think about the term itself: this “.” is a point. It’s small; easy to chew, swallow, and digest; and very easy for a salesperson to quote. “That’ll be 4.375% and 2 points, Ma’am.” The idea is to get you thinking in terms of small things, and pieces of small things. The salesperson would much rather have you comparing fractions of differences in points between him and his competitors, than doing the actual calculation. Let’s say, for example, you’re requesting a $300,000 mortgage; those two points represent two percent of the loan amount, which means $6,000 of your hard-earned dollars! Imagine what it would be like if lenders quoted in terms of actual cost rather than percentages: “That’ll be $13,125 per year for the next thirty years and $6,000 at the time of close, Ma’am.” Have you ever in your life heard a salesperson speak in those terms? Of course you haven’t! Because all his potential clients would be choking on their own spit and thinking twice about buying! The IRS has used this principle for decades to massive advantage; and as a result, most people I talk to, who receive a regular paycheck, have no clue whatsoever as to what they actually pay in taxes from each check. The IRS has trained them to focus on the net, and dangles a distractive carrot before them in the form of a refund at the end of the year. They are overjoyed if they get one, as if somehow this were not just a tiny portion of their own money coming back to them (without interest), but rather some sort of unexpected windfall.
My "point" is this: in order to become a wise borrower you must train yourself to think in terms of actual cost; and in order to think in terms of actual cost, you must know how the calculations are made. With mortgage loans, many of the most costly fees are calculated as a percentage of the loan amount; and the jargon used to describe that percentage is the term "Points."
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