Interest rate and points
“A lender is offering loans with no points and no fees. Is there a catch?”
First, some definition of terms. Points mean a percentage of the loan amount that you pay at closing. One point means you pay 1% of your loan amount. Fees usually include non-recurring costs associated with getting the loan. Some of those fees are appraisal, credit report, documentation, title, escrow, notary, recording, and processing. Some lenders could charge additional fees.
It is common sense that the lender has to make money somewhere. If the borrower doesn’t pay him anything, where does he make his money?
Lenders make money on the “backend” by charging a higher interest rate.
For example: The lender offers you a no point loan with an interest rate of 5.75%. The same lender can give you a lower rate of 5.5% if you pay one point. By giving you a .25% higher rate, he gets a “rebate” from the investor who lends the money.
Generally speaking, one point is equal to .25% interest rate. Or 1/2 point equals .125% interest rate.
So should you take 5.5% and pay 2 points or take 6% with no points? Which is better for the borrower? It depends on your situation. An honest lender will help you do the calculations and show you which scenerio is better for you. Either way he makes money.