How Negative Mortgage Points Work

Negative mortgage points, also called rebates, are paid by the lender to the borrower as a percentage of the total home loan. As is the case with positive mortgage points, one negative mortgage point is equal to one percent of the overall home loan. Negative mortgage points should not be considered part of an appealing home loan package. Instead, they are a way for people that are severely tight on cash to finance a home.    

The Process

The lender presents the home owner with a package that includes an interest rate and a number of points. Whether dealing with positive or negative points, the number of points purchased and the interest rate paid move in opposite directions. As the number of points decreases, the interest rate increases. If the borrower chooses to use negative mortgage points, he or she will receive one, two, or three percent of the overall loan from the lender, depending on the number of points. In return, the borrower agrees to pay 0.5 more in interest per month per point. For example, assume that a lender is offering a traditional $100,000 loan at 7% interest. If a borrower wants to take out a traditional $100,000 loan with -2 points, the lender will pay the borrower $2,000 and the interest rate will increase by one full point to 8%.

Negative mortgage points benefit the lender because he/she receives higher monthly payments due to the increased interest rate. Negative mortgage points benefit a borrower who is short on cash because he/she receives money from the lender. The money that the borrower receives must go towards paying the costs associated with processing, evaluating, and accepting his or her application for a loan. In reality, the money goes back to the lender because the payment simply lowers the settlement or closing costs associated with securing a home loan.

Who Should Use Negative Mortgage Points

Negative mortgage points are good for people who are not planning on staying in their homes for long. The higher interest rate associated with negative mortgage rates will not be detrimental to a short term home owner because the high payments will not be paid for very long. This type of home owner will benefit from the lower upfront costs. If a homeowner plans to stay in his or her home for a long period of time, but still agrees to pay the higher interest rate in order.