posted on 06-06-2019

Negative Points

Updated October 1, 2019

What are Negative Points?

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 Do Negative Points Work?

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 Do Negative Points Matter?

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.