Negative Points: Meaning, Example, Pros & Cons

Negative points are a financial tool used in the mortgage industry to make homeownership more accessible for certain individuals. They function as rebates provided by lenders to real estate brokers or borrowers to help them manage the financial burden of closing on a mortgage. Essentially, these points reduce the upfront costs associated with obtaining a mortgage, making it possible for some qualified borrowers to purchase a home.

Negative points are typically expressed as a percentage of the principal loan amount or in basis points (BPS). It’s important to differentiate them from discount points, also known as closing points, which are purchased upfront by borrowers to lower their monthly mortgage costs over the loan’s term.

Negative points come in two primary forms: yield spread premiums (YSP) to brokers and borrower credits. Yield spread premiums are rebates paid to mortgage brokers as part of their compensation. When the rebate is given directly to the borrower, it can be used to offset some loan settlement or closing costs. This borrower-use of negative points is often referred to as a no-cost mortgage.

However, the amount credited to the borrower cannot exceed the settlement costs, and it cannot be part of the down payment. Negative points can cover nonrecurring closing costs like bank and title fees but cannot be used for recurring expenses such as interest or property tax.

To illustrate how negative points work, consider a borrower seeking a $1,000,000 mortgage with a 20% down payment of $200,000. If they accept two negative points, the lender might increase the loan’s fixed interest rate by 0.25% while offering a 1% credit against closing costs. This results in a $20,000 rebate that can be applied to the loan’s closing costs.

In contrast, a more traditional loan structure for the same home purchase might involve a 4% interest rate and a one-point down payment, requiring the borrower to pay a $10,000 down payment.

It’s essential for eligible homebuyers to be aware of negative point programs and to inquire about their broker’s fee structure. Some brokers may prioritize their commission and not disclose the availability of negative point loans. Historically, mortgage brokers have been known to markup mortgages and retain the amount generated from negative points as compensation for brokering the loan.

Researchers have found that the markups earned by mortgage brokers were persistently higher on negative point loans than on positive point loans. For borrowers, it’s crucial to understand that while negative points can reduce upfront costs, they will also raise the total cost of mortgage interest paid over the life of the loan, resulting in increased monthly payments.

Negative points in mortgages can be a valuable tool for borrowers who have limited upfront cash to cover closing costs. They provide a way to reduce the financial burden of obtaining a mortgage, making homeownership more accessible. However, it’s crucial to understand that using negative points typically results in a higher interest rate over the life of the loan.

Borrowers should carefully consider their financial situation and long-term goals when deciding whether to use negative points. If you plan to hold the mortgage for a short period, the reduced upfront costs may be beneficial. However, if your intention is to keep the mortgage for an extended period, it might be more economical to pay upfront settlement costs in exchange for a lower interest rate.

Remember that while negative points can help you secure a mortgage and a home, they also come with financial trade-offs. It’s essential to be aware of the potential long-term costs and to make an informed decision based on your unique circumstances.

Negative points in a mortgage are rebates offered by lenders to borrowers or brokers to help cover closing costs, making homeownership more accessible.

Negative points typically lead to a higher interest rate over the life of the loan, as borrowers receive rebates in exchange for higher interest rates.

No, negative points can only be used to cover nonrecurring closing costs, such as bank and title fees, and cannot fund recurring expenses like interest or property tax.

Negative points are rebates that reduce upfront costs, while discount points are prepaid interest that borrowers pay to lower their monthly mortgage costs over the loan’s term.

One potential risk is that borrowers may overextend themselves on the loan by focusing on reduced upfront costs without considering the long-term financial implications.