Negative Points

What It Is:

Also called a yield-spread premium, negative points are rebates lenders pay to mortgage brokers or borrowers for mortgages. Negative points are expressed as a percentage of the principal.

How It Works/Example:

For example, let's assume that John wants to borrow $100,000 to buy a house. He receives a quote for a negative point loan with a 5% interest rate and -2.125 points, meaning that he will receive a $2,125 rebate that he can apply to the loan's closing costs.

The alternative and more traditional loan structure for the same amount might be a 4% loan and one point, meaning that the loan has a lower interest rate but requires the borrower to pay $1,000 up front for the loan.

It is important to note that mortgage brokers don't always inform consumers about available negative point loans. A mortgage broker might, for example, receive a quote from a wholesale lender for a loan that has a 5% interest rate and -2.125 points. On a $100,000 loan, these negative points translate to a $2,125 credit that can be applied toward closing costs. However, in order to earn money on the transaction, the mortgage broker marks up the loan to the consumer and quote a price of, say, 5% and 0 points, thereby keeping the $2,125 as compensation for brokering the loan.

Why It Matters:

Negative point loans tend to have higher interest rates, which is why borrowers who plan to be in their houses only a short time tend to be the best candidates for these loans. The extra interest over a relatively short period of time tends to add up to less than the closing costs the borrower would have had to pay otherwise.