4.    Origination and Discount points, Closing costs, Yield-Spread Premium, Zero Cost! Pre-paids…………..HELP, I give up!  &**%$$%!

Curiously enough, most of the “mysterious” items above were created as tools to assist and help homebuyers rather than leave you in an utter state of confusion. Yes, indeed! And whereas they can help you in the home buying process, there are now so many tools that it is confusing to just about anyone not directly involved in our business. Let us take them one by one:

Origination Points: This is a fee lenders can charge for doing the loan. Each "Point" equals 1% of the loan amount (i.e., borrow $200,000 and an Origination Point equals $2,000). It may or may not make sense for you to pay a Point (See FAQ 1-"What Are Interest Rates?"), as it does impact the interest rate you will receive.

Discount Point: VERY similar to an Origination Point, this is a fee the lender can charge for lowering your interest rate. Again, sometimes it makes sense to pay this fee, and sometimes it does not. It depends mostly on how long you expect to stay in your home, or, perhaps more precisely, how long you plan to keep the loan. Let's talk!

Closing Costs: These are the actual costs of the loan and include the costs mentioned above plus:

Yield Spread Premium/Service Release Premium: These are fees (percentage) the lender pays the broker to secure a loan. Part of this fee can be used to defray some of the loan costs, but nothing comes for free. You may be stuck with a somewhat higher interest rate…

Zero-Cost: Again, what have we all been told time and time and time again? Nothing comes for free. Don’t want to pay now; you’ll pay later. And that’s how it is in the mortgage business as well. However, sometimes a loan can be structured in such a way that yield spread premium can pay for all closing costs and still pay the costs for us to do the loan. This will inevitably result in a higher interest rate than the rate obtained by the person who has paid the loan costs up front (again, nothing comes for free!), but if this interest rate is lower that what you’re presently paying, well, then, why not go ahead?

Pre-paids (real estate taxes, homeowners insurance and interest): These are really not "costs of the loan" as much as they are costs of owning your home. Most often a lender will ask you to deposit (aka "escrow/impound") monies for future taxes and property insurance so that you do not suffer payment shock when it becomes time to pay these costs. They will also collect upfront for the daily interest due for the days remaining in the month your loan closes.