Negative Points

Negative points are rebates lenders pay to real estate brokers, or borrowers, for mortgages. This system allows many who could not afford the expense of closing cost settlement to bear a home purchase. However, the mortgages with negative points are usually at a higher rate of interest. The expression of negative points is as a percentage of the principal amount. The principal is the original, borrowed sum of money.

Rebates paid to a mortgage broker, are known as a yield spread premiums (YSP) and are part of the mortgage broker's compensation. When the rebate is a borrower credit, it can be used to defray some loan settlement or closing costs. This borrower-use of negative points is known as a no-cost mortgage. The amount credited to the borrower may not exceed the settlement costs, and cannot be a part of the down payment. Negative points can be used to cover some nonrecurring closing costs, such as bank and title fees, but cannot be used to cover recurring expenses such as interest or property tax. 

Negative points provide a way for borrowers with little or no money to pay the settlement costs obtain a mortgage. However, the economics of using negative points depend on the borrower's time horizon. If the borrower intends to hold the mortgage for a short period, it can be economical to avoid upfront costs in exchange for a relatively higher interest rate. If the borrower intends to hold the mortgage for an extended period, it is most likely more economical to pay upfront settlement costs in exchange for a lower interest rate.

Applying negative points to a mortgage increases the interest rate but can reduce closing costs. If a borrower accepts one negative point, the lender could raise the interest rate by 0.25% but give the borrower 1% of the loan as a credit against closing costs. 

For example, a borrower seeks a $1,000,000 mortgage loan to buy a home. A quote for a loan with a 5% interest rate and two negative points would yield a $20,000 rebate to apply to the loan's closing costs ($1,000,000 x 2% = $20,000). 

The more traditional loan structure for the same home purchase amount might be a loan at 4% interest and one point down payment. With this loan, there is a lower interest rate, but it requires the borrower to pay a $10,000 down payment. 

Some mortgage brokers may not tell consumers about the availability of negative point loans. These brokers may be more concerned about their commission on the deal. Since, on the 5% loan, the broker would mark up the mortgage and keep the amount of the negative points as compensation for brokering the loan.