How Do Commercial Loan Discount Points Work?
Feb 09, 2017
Negotiating a good deal for your clients is essential for commercial real estate brokers, but we don’t have to tell you – it’s not easy work. If you’re fortunate to have a client or clients who are interested in any types of commercial loans, you’re tasked with all the minutia involved in the commercial real estate investing process.
In this series, we’d like to help you broaden your knowledge base, stand out to clients, and ultimately become a resource for any question they may have along the way. Today’s topic: “Points,” what they are, where they came from, and how your clients can create successful futures with their commercial loan interest rates.
Mortgage Points: Defined and Explained
Let’s keep it simple. A point, also known as a “mortgage point,” is a fee equaling 1% of the total commercial loan amount. For example, on a $100,000 loan for a piece of commercial real estate property, one point would equal $1,000; on a $1 million loan, one point would equal $10,000.
There are two types of points: origination points and discount points.
1. Origination Points
Origination points exist to compensate loan officers who process the loan and may play other roles in the commercial real estate lending process. These points sometimes include other fees associated with the loan, or may be charged alongside these other loan-related fees, and not all commercial mortgage providers require origination points.
2. Discount Points
Discount points function like prepaying interest, and are paid to the lender in exchange for a reduced commercial loan interest rates. A majority of lenders allow borrowers to purchase anywhere from zero to three discount points, and each point generally lowers commercial loan rates by 0.25%. When people refer to mortgage points, they’re generally referring to discount points, which are essentially a form of pre-paid interest.
Tips for Discount Points Success
Now that we’ve shed light to detail how mortgage points work, we can explore just a few ways in which to leverage points for your clients’ commercial real estate loans.
1. Get comfortable with the details.
It goes without saying that a $100,000 loan is different than a $1 million loan, but don’t forget that one point is always 1%. The value of that point, whether it equals $1,000 or $10,000, can change the commercial real estate lender’s outlook as well as the buyer’s.
Discount mortgage points look attractive to buyers, but depending on your intentions with the property and the value of the commercial real estate, it may not be the best idea to apply the money there. Make sure your client is taking all factors into consideration before proceeding with any lending institution.
2. Think about the long term.
Remember: Paying discount points up front helps you over time – it takes time to recoup your cost. Even if you’ve paid two mortgage points totaling $10,000 each, a lower interest rate will still take you four or five years to recoup.
If your client is planning to sell the property within three years, it doesn’t make sense to pay money up front for lower commercial real estate financing rates they can’t actually take advantage of. However, if they’re looking to own for the full length of the commercial mortgage, the savings can really add up.
3. Shop around.
Points stay the same, but lenders vary. Some commercial real estate lenders charge higher origination fees and may even charge higher totals on smaller loans to ensure they’re still earning money from the loan up front.
Meanwhile, others may offer rosier discounted rates than 0.25% for every discount point. The only way for your client to find the best commercial lending opportunity for their specific commercial real estate investing situation is to look at the options.
Are discount points worth it?
Commercial real estate investing is a major financial consideration for your clients, and they’ve come to you to help them strike the right balance. Benefiting from discount points means understanding everything about commercial real estate lenders. Who knows – after researching the options, you and your client may discover a commercial hard money loan is a suitable fit for their needs. Establishing yourself as a resource is the best thing you can do for your clients, who will truly appreciate all the hard work you do.