Bad Credit Mortgage: Avoid Overpaying Points

Consumers who apply for a mortgage loan are usually presented with a wide range of financing options.

These options often come with different features. One common component in the different alternatives is the mortgage points. For consumers who can only qualify for a bad credit mortgage, this presents a potential problem. But to avoid such occurrence, here is a primer on mortgage points and how they can affect your mortgage.

A point is an upfront fee that is usually paid at closing. Each point is equivalent to 1 percent of the amount borrowed. By paying points, you can avail of a mortgage loan with a lower interest rate. However, if you do not pay points, you will get higher interest rates for your mortgage loan. If you plan on owning your home for a long period of time, you are advised to pay points upfront. If you have a fixed-rate 15- or 30-year mortgage loan, you might want to pay points and take advantage of the lowest mortgage rates.

While customers with good credit may not have any points to contend with, borrowers with bad credit may need to pay for four to five points. Some mortgage brokers may inveigle unsuspecting customers to paying up to 10 points, although there are cases when this is justified. One good explanation for the extra fees entailed by a bad credit mortgage is the hard money loans that involve higher risks for private financiers. Another justification for this is because the type of people that mortgage lenders provide a bad credit mortgage to entails a greater risk. Despite this, the mortgage industry puts a limit on what is deemed proper.

Points are sometimes referred to as origination fees, broker fees and discount fees. Regardless of the variety of names, points have two basic types: upfront and back end points. Upfront points are paid by the borrower to the lender or loan broker as a fee for handling the loan transaction. With upfront points, the borrower with a bad credit mortgage loan has to be careful since there are brokers who charge hefty points just to earn themselves a better income.

Back end points are those usually paid by the mortgage lender to the mortgage broker. Most of the time, back end points are the only added incentive to bring a bad credit mortgage loan to fruition. But in some cases, back end points can be payments made to the broker from the lender as an incentive for a bad credit mortgage loan with higher interest rates.

With back end points come two kinds of problems. First, dishonest brokers will try to charge bad credit mortgage borrowers unnecessary fees that are not considered fair and reasonable by industry standards. Second, some states do not require disclosure of back end points, putting consumers, most especially those with bad credit mortgage loans, at risk of being exploited by unscrupulous brokers.

If you have a bad credit mortgage loan, you can avoid these potential problems involving mortgage points by looking for back end points on the HUD closing statement. One thing to remember is that you won’t find the figures in the columns since your mortgage broker is paid directly by your mortgage lender.

Having a bad credit mortgage loan doesn’t mean that you should accept every single condition that is being imposed on you. To avoid being treated unfairly by deceitful brokers, be informed of all your rights as a mortgage borrower.