I think they can quote you a low rate with no discount points, but then add in a bunch of other fees at the last minute.

Anyway, I wonder if the logic about shopping for low interest rates works in reverse. For instance, imagine accepting a higher rate where the broker passes the YSP bonus on to the client, who uses it to eliminate closing charges to the extent that’s kosher with Fannie Mae, which in turn would decrease or eliminate the PMI premium.

It’s only relevant when one’s close to being free of PMI, but it could be an advantage to some people. I’m a member of a credit union ( a good one!) that offers 30 year fixed loans with 5% down or more; PMI if one’s worse than 80% LTV. I looked at this and adding on the basic interest on the part of the loan over 80% along with the PMI premium indicated that I would be paying about 4% over the basic loan rate – equivalent to paying 10-11% on a second mortgage, say in 80-10-10 style. And naturally the effect gets worse as you pay down the note and get closer and closer to 80%; I don’t think PMI premiums get pro-rated to the ‘pro forma’ LTV left on the note.

So, to make a long story short, I think there have got to be people who would benefit from a higher interest rate if closing costs got eliminated and the benefit of this passed to the consumer.

In other words, loans with *negative* points so that nearly all of the cash someone brought to the settlement table would go to improving LTV, and not to closing costs. It could be sold as, ‘yes, you are paying a higher interest rate, but you start out owning 5% of your house – if you didn’t do it this way, you wouldn’t have paid down that much for 3 or 4 years’.

When I bought my house, recently, I structured the transaction so that what I brought in went toward the note.

You’re point on PMI is incredibly important. If the discount points take the loan to a point where private mortgage insurance is required then the discount is actually costing you more money each month for the privilege of having the lower “rate”.

Thanks for your insightful comments on this issue Ben. It just goes to show that shopping for the lowest rate with out consideration of other factors is a bad idea.

The real comparison is against putting the 3750 into (say) a 10 year Treasury note or into increasing LTV. Especially if the increase in LTV takes one out of PMI-land.

Naturally tax issues make it all more complicated but I think that after one does the right discounting and with reasonable inflation assumptions, it basically never makes sense to buy the points unless you’re sure you’re going to pay down the bulk of the note.