To Pay or Not to Pay Points, That is the Question

Caeli Ridge recorded this episode on 7/11/2023

To Pay or Not to Pay Points, That is the Question.
And it might be a trick question...

During this episode Caeli details how to figure out what your interest rate will be.. the old school way. By using a chart and, say it with me "Doing the Math" :)

This breakdown explains why interest rates end of being what they are and everything that goes into their pricing.

Caeli explains Ridge Lending Group's points and why you may or may not have to pay points in any given transaction and the why behind it.

We have lots of great questions this week that are interspersed through the event.

Check out the video with the screen share and the documentation in the Community.

You can join these live each week by following this link to join the call:
https://community.ridgelendinggroup.com/events/live-with-caeli-each-tuesday-beginning-at-430-pm-et/list

As always, give Ridge Lending Group a call if you have any questions at
855-747-4343 or email us at info@RidgeLendingGroup.com

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Karlie Libby: Hello, everyone, and welcome. Thank you so much for joining us today for calling all real estate investors.

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Karlie Libby: We are here every Tuesday. for this live event with Caeli Ridge at 1 30 Pm. Pacific time, and in 4 30 Pm. Eastern time. so thank you again for joining

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Karlie Libby: Remember to please utilize the chat feature that we have here. on zoom, so that We can get your questions answered. We love audience participation here. Caeli loves to answer your questions, so please send those in as they come up, and we will get to answering them as soon as we're able to throughout the call.

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Karlie Libby: So todays topic will be going through what points are associated with non-owner-occupied loans. So she often gets to use questions. She wanted to. give you all a full review and breakdown of what to expect for these types of loans during your next transaction.

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CAELI RIDGE: So, handing it off to you, Caeli. Thank you so much. Thank you, my dear. Hey, everybody. Thanks for being here on this Tuesday. Just to quantify or clarify a little bit. I think the tagline for today's live with me, was what was it I? I came up with something kind of cheeky. paypoints or not to pay points. That is the question. from our Buddy Shakespeare. So

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CAELI RIDGE: it's going to be about that. But I also want to comment for you that that I'm going to take this in a different direction. And this is

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CAELI RIDGE: This is, thank God, is being recorded because I suspect that most of you are going to want to come back and and re listen to some of this maybe more than once we're going to get into the weeds here a little bit. I'm going to have some visual aids, and I'm going to share with you guys. But even with that it's really high level stuff, but I think that it's not going to hurt to share some of it. And I'm gonna you know, without sounding

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CAELI RIDGE: rude. I'm gonna dumb it down a little bit, because this stuff, even for me sometimes, can be a little bit overwhelming. So just we'll we'll take our time. We're gonna unpack this slowly. I anticipate we're gonna run over the 30 min. So we may even roll into about the 2 30 h. So if you can't make it that long cool. It's gonna be on record, so you can come back and watch where you left off.

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CAELI RIDGE: all of that said I was up late last night kind of putting together some notes and making sure that my delivery is going to be as concise as possible, because the content is rather complicated, so I may be reading off my cue cards here to make sure that I don't forget anything. As Carly said. Please put your questions in the chat. She'll interrupt me if she thinks it's poignant, poignant, and timely to the conversation, and I will stop and answer. Okay.

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CAELI RIDGE: so we are going to be talking about rates, but not necessarily just rates more specifically, paying points for an interest rate. And then I'm going to get into some of the history and the why behind the how. All right.

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CAELI RIDGE: let's start with kind of the easy part. Let's and I can get over this this piece pretty quickly.

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CAELI RIDGE: so When does it make sense to pay points on a loan, whether it be an investment loan, a second proper second home property your owner occupied, whatever it is. When is it appropriate to pay points? And let me preface by saying with you guys, that all of this next bit of information I'm going to give you is relative to a normal rate market. That is not where we live right now. We are not in a normal right environment.

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CAELI RIDGE: in fact, it's it's quite the opposite. And while under normal circumstances, you guys get to choose right. If if anybody's had a mortgage or received a mortgage in the last 5 plus years.

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CAELI RIDGE: Up until recently, you know that there's been a choice between whether paying points and not paying points was up to your discretion. That is not true. Today there is no 0 rate option. Okay?

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CAELI RIDGE: regardless, I want to define for those that may not be familiar with this math? When does it make sense? When is it appropriate when the choice is ours not applicable today? But when the choice is ours. When is it a good idea to to pay points? And when is it not? The answer to when it is a good idea depends. Almost okay, notice that my inflection on almost has a particular tone. I will come back to that in a second. but

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CAELI RIDGE: it depends almost exclusively on how long you intend to hold the property. more specifically how long you intend to keep that particular mortgage? Because, for example, if you think you're going to hold this property. Let's just say that you know you're going to hold it for 5 years. Okay, but within that 5 years time before you think that you're going to offload it.

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CAELI RIDGE: sell it to a 1031 exchange, whatever it may be. you expect that it's in a you know. It's in a market that you expect to have some appreciation, and chances are pretty good that you're gonna refinancing it, maybe prior to even selling it. So in that example, you're probably going to want to focus on not necessarily how long you're going to have this property, but specifically, how long you're going to have that mortgage because you intend to harvest

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CAELI RIDGE: some of the equity.

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CAELI RIDGE: Right? You're gonna do a cash out refinance, and who by maybe show of hands really quickly, who remembers the the detail about the tax advantage of borrowed funds.

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CAELI RIDGE: Anybody? I I won't wait for you guys to answer. I'm just gonna answer it for you. But if you'll recall, borrowed funds are non taxable. So one of the great advantages of real estate investing, especially when you've got a balanced portfolio, and you've got properties that are in markets or areas that we know. It's going to show some appreciation that in a couple of years time, or whatever it may be we're going to do cash out refinances, pull money out borrowed funds, non taxable. Use those funds for what more acquisitions, more purchases? Right?

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CAELI RIDGE: so that may might be part of your strategy. If you know that that's going to be the case.

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CAELI RIDGE: deciding on whether or not you're going to pay points. That's your answer. If you know how long you're going to keep that mortgage. That is the primer to determining whether or not you're going to pay points. Okay, the math is very simple, and many of you listening to this here and and maybe later on the recorded version.

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CAELI RIDGE: are very familiar with this math. In fact, it's probably one of the first bits of of information you learned early on. But for the rest of you that may not be familiar with this concept. It's very, very important that you hear it.

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CAELI RIDGE: know it and understand it. And it's not nearly as complicated as maybe it sounds on the surface. So let's dig into this really quickly. And I'm going to get into some of the higher level stuff.

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CAELI RIDGE: So if you've identified how long you're gonna have the mortgage. Let's say it's 2 years, 5 years, whatever the number is, then the next bit of information you need is what is the interest rate you're being quoted right now without points. Okay, whatever that baseline is, let's call it for a round number. Let's say that it's 6%. Okay. You know what your loan amount is.

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CAELI RIDGE: in my example, we're gonna say that the loan amounts a hundred $1,000. So you have that bit of information. You've got that data. And then we're also going to say that for every eighth of a percentage point that's equivalent to point 1 2 5 every 8 of a percentage point

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CAELI RIDGE: difference in rate, there will be a cost or reduction in rate. There will be an additional cost associated a point 3 7 5. Now, I chose these numbers in advance because they're nice and easy and round. Okay, so let me just recap

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CAELI RIDGE: our loan amount in my scenario that we're going to figure out the math on when it makes sense to to pie, to buy points down or not. They have a loan amount of a hundred $1,000. We have an interest rate that requires no points. At 6%.

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CAELI RIDGE: We know that the every eighth of a point reduction from 6 down we'll come with an additional cost of point 3 7 5. Okay, so let me fill in some of the blanks.

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CAELI RIDGE: An eighth of a percentage point on a hundred $1,000 is equivalent to $8 a month. Difference in payment.

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CAELI RIDGE: Okay, if our loan amounts a hundred $1,000, 3, 8 of a percentage point or point 3 7 5 same thing.

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CAELI RIDGE: the math round map there is obviously $375. Okay, so follow me here.

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CAELI RIDGE: We're starting at 6. If I want to buy my interest rate down to 5.8 7 5,

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CAELI RIDGE: that's point 1 2 5 or 1 8 of a percentage point lower.

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CAELI RIDGE: Okay, I know that the payment difference between those 2 interest rates is $8 a month

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CAELI RIDGE: and the cost in my example. And these are just random numbers. You guys. Okay, the cost is point 3 7 5 or $375. If I take a hundred grand times point 3 7 5 that equals $375. Okay, so far, if you you guys are with me, good. If not, raise your hand, put your your question. There, I'll come back to it.

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CAELI RIDGE: But that's easy math stuff. Now, all you have to do with that information is, take the cost

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CAELI RIDGE: $375 and divide it by the savings. $8.

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CAELI RIDGE: What you're gonna come up with is a break even

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CAELI RIDGE: of 46.8 months.

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CAELI RIDGE: Okay, that was Antonio just said so. It take 47 months to recoup that difference. Good Antonio. Exactly right, exactly right. So 47 months to recoup that upfront cost

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CAELI RIDGE: with the monthly savings that you're going to to yield as a result of this. So then you go back to your original question, how long am I going to have this mortgage. How long am I going to have this mortgage? If you know it's at least 46.8 months.

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CAELI RIDGE: then it probably makes sense to pay that that extra keeping in mind that there's other variables. Okay, I'm just kind of focusing on the the basic piece of math. There's lots of other variables that you're going to want to consider when making this decision. of course, there's the tax incentive

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CAELI RIDGE: points on an investment property are tax deductible. Okay, so there's going to be a little extra over here that might play a role, depending on on the circumstances and your tax brackets, etc., etc.

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CAELI RIDGE: But otherwise, if if you know that you're gonna have the property or the mortgage that long, yeah, pay the points. If you know this property is going to sell in 2 years. It's just going to be a turn and burn, or maybe it's a a a fix and flip right? Whatever it is you want to avoid the points like the plague? Why would you pay that extra money unless you really need that tax incentive? And you need those losses.

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CAELI RIDGE: Why would you pay points if you're not gonna have the property long enough to reap the benefit or reap those rewards? So that's that's the math, man, right? It's as easy as it gets. So just a real quick, quick recap. Identify how long you're gonna have that mortgage figure out. You know what you're you're great. Being quoted or offered is.

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CAELI RIDGE: figure out what the cost is for every eighth or quarter point, difference in rate.

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CAELI RIDGE: And then the monthly payment divided by the cost that gives you the number of months. Simple, simple, simple. a few other things that that just to put it out there so that I'm I'm kind of covering my butt.

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CAELI RIDGE: that would be in important to remember when you're deciding.

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CAELI RIDGE: We talked about the the tax incentive, right? The scheduling, and some of the write offs that you're gonna get? what is the cash flow? Does the property already cash flow? Really really strong? what are the current annual rent appreciations being targeted for this property? Is it appreciating it? 1% a year of rents? is it 10? That would be. Another thing to consider. Is the seller paying towards your closing costs? Is there going to be a seller paid, closing cost credit that might help instead of it being your money.

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CAELI RIDGE: The seller is going to contribute towards your closing cost, maybe that weighs in on here. So some other things to consider but overall the math, for when to pay points and when to not pay points when it is a choice.

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CAELI RIDGE: I'm going to keep saying this. It's not a choice. Today you're going to learn why in a minute.

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CAELI RIDGE: those are some of the things to consider. Okay, comments, questions, anybody real quick. Before I really dig into. Why I want you here today, and what I want to talk about

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CAELI RIDGE: when we can't avoid those costs absolutely. There's well, Dave, thank you, David. There's no choice there. There is no. And let me think about this, and and how I want to, because there's a sequence here, guys in terms of how to define for you why points are required right now, and I think, David, if I may, I'm going to hold that part. The actual. Why, off for a minute.

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CAELI RIDGE: and I want to just talk about the more of the inner workings of rates. Okay, let me just check my notes here.

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CAELI RIDGE: I already talked about that.

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CAELI RIDGE: Okay.

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Karlie Libby: we did have one more question here if you wanted to. Let's see. So, mia, thank you for your question, she said. She's looking for a deal where a builder said they'd buy down the rate by 2. So what does that translate to? Is it 2% is not the same as reducing by 2? Is it

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CAELI RIDGE: so? just to recap? Tell me if this is is incorrect, the builder is going to contribute 2. A credit of 2% of your probably of your purchase price, not the loan amount, which, by the way, is what points are going to be based off of.

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CAELI RIDGE: But the seller of the builder is willing to contribute 2% of the purchase price towards your closing cost, which in this case you're going to use to buy down the rate or the points. So what that means is that if the purchase price was a hundred $1,000. The seller is going to give you a credit of 2 grand of which to use to buy down the rate. And it isn't dollar for dollar, just because you have 2

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CAELI RIDGE: which translates into a dollar figure of $2,000. But that 2% doesn't mean that if you were quoted 6 that you're going to get a 4% interest rate. That's absolutely not how it works. and I'm going to get into some of this. And remember, you guys.

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CAELI RIDGE: this is high level stuff. Okay, it's I, I expect again, without being dismissed of a rude. It's going to be over most of your heads. Sometimes it's over mine, so feel free to go back and listen to this. let's get in. I'm gonna pause on the questions now Carly, let's get into some of this and anything that wasn't covered and needs to be re iterated or talked about again. We'll do it at the end. Okay.

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CAELI RIDGE: okay? So

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CAELI RIDGE: there's something called premium pricing. Okay, premium pricing or lack there of is what's going to determine for us the cost or the credit of the rate that you're going to lock.

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CAELI RIDGE: as I've mentioned a couple of times now our current rate environment, particularly for investment property and second home. Those are getting hit harder. removes our ability to choose between paying points and not paying points. There isn't that option right now

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CAELI RIDGE: so to lock in an interest rate for most mortgage transactions today, paying points is just an an uncertainty gone in the days, at least. For now that using premium pricing as a way to avoid points. is going to be that choice.

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CAELI RIDGE: So let's define premium pricing. This is when posted rates for that day or that time of the day, because rates can change throughout the day. If it's a particularly volatile day in in secondary. Okay, mortgage back security secondary

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CAELI RIDGE: premium pricing is that when a interest rate is posted it's offering something called yield, spread or ysp, yield, spread premium, yield, spread premium or well yield. Spread is a premium in a percentage form that is offered

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CAELI RIDGE: over and above what the cost of that loan transaction is going to mean. Okay? And that leads into something called Llpas loan level price adjustments. Guys, you heard you've heard me talk about this in the past. If you've been listening for any span of time an Llpa loan. Level price adjustment is a positive or a negative number

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CAELI RIDGE: that will attach to the individual characteristics of your loan transaction. Okay? An llpa for an owner occupied where you're going to reside, where you're going to live versus one that you're going to use as an investment property that you're going to rent out is a big difference. The Llpa for an owner occupied is going to be far less because it's all risk based. And I should have preface by saying this. So

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CAELI RIDGE: Llpas are are basically another way of assigning risk. All right, the higher the risk, the higher the Llpas are going to be loan level price adjustments. And I'm going to give you guys a visual aid here in just a second.

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CAELI RIDGE: So some of the variables that that are the details or how I can. I can explain. the Llpas we talked about occupancy owner occupied versus non owner occupied as a pretty big one. You've also got a loan size loan amount can also be a pretty big Llpa difference. The difference between a $50,000 loan amount

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CAELI RIDGE: versus a $500,000 loan amount pretty big difference. you've got property type, single family residence versus a 2 to 4 unit property

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CAELI RIDGE: we've got a credit score can be an Llpa pretty significant. Llpa. A lower credit score is, gonna have a a higher Llpa versus a higher credit score might even have a benefit. A positive number to the Lpa. Because, remember, I said, that the Llpa

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CAELI RIDGE: is a positive or a negative number, transaction type. Is this a purchase? Is it a refinance?

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CAELI RIDGE: Is the refinance or rate in term refinance? Or is it a cash out refinance? So all of these variables and a lot more are going to dictate what your actual interest rate becomes, or what you lock at, and whether there's points or not. Right now, there's going to be points.

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CAELI RIDGE: and that's how we're going to figure it out. There's going to be a raw price once we have gone through what's called a rate sheet, and that's going to be my visual aid here. once we've identified what all of those variables are specific to the transaction that you're trying to close on. And then we're going to take that Llpa raw number, and we're going to look at that Ysp, that that yield spread number

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CAELI RIDGE: the yield spread is going to be

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CAELI RIDGE: a premium that is attached to that specific interest rate on that day.

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CAELI RIDGE: Okay, I think I'm gonna pull up my my visual aid. I think there was something else that I was gonna mention here. But maybe I'll come back to that. So let's go like this

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CAELI RIDGE: share screen.

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CAELI RIDGE: I want to be on this one. I think, guys. okay, this is going to be like looking at Greek.

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CAELI RIDGE: Okay, can you see what looks like a bunch of numbers and boxes and stuff. Okay.

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CAELI RIDGE: so what? This is what you're looking at. This is an old school rate sheet. We don't use these anymore. I I found this one as a as a nice example. So that you guys had that visual aid. Because if I just started spitting off all kinds of of numbers for you. I don't know about you. I I wouldn't be able to follow it. So I wanted you to watch and and see what we would. We go through old school. It's still the same, since still comes out to be the same number, but we used to do it just like this manually. I'd have printed paper

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CAELI RIDGE: rate sheets on my desk every morning, and I would be able to highlight the individual transaction that I was pricing for a quote for a borrower, and I would go through with a highlighter, and I would figure out what all of the variables associated with that transaction were, and I would be able to get a raw price and then ultimately an interest rate. You'll see what I mean in a second.

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CAELI RIDGE: So is this big enough. Can you guys see it? Do I need to make it bigger?

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CAELI RIDGE: Is it? Is it legible? You think you can? They can see that. Okay, I can see if anyone is having trouble. Please let us know in the chat.

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CAELI RIDGE: anyway. So this is just one you'll notice down here at the bottom. There's lots of different products here. We're just going to focus. I just pick this one. It doesn't even matter for our for our example. It's it's irrelevant. So I want you to focus on this 30 or fix. These are going to be the interest rates. Okay? And this is going to look kind of funny these numbers here are going to look kind of funny, but you'll notice that

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CAELI RIDGE: some of them are below 100. Some of them are above 100. So when you get to the the 100, so 100.1 2 5

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Karlie Libby: let's see, chile, sorry before you get too far ahead. Can you make me make it, if possible.

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CAELI RIDGE: How's that, guys?

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CAELI RIDGE: That's that should be good. I don't think I can make it bigger and and keep it on the screen.

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CAELI RIDGE: Okay?

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CAELI RIDGE: So we're gonna focus on the 30 year fixed rate. Okay, so these are 30 or fixed. You'll notice there's a 15 to 10 10 your arm 7 year. Yada! Yadda Yada! Here's the rate here in Column a here are the 30 year fixed rates. I'll come back to kind of what some of these mean in a second but just to say that anything over 100

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CAELI RIDGE: point 0 0 is a premium.

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CAELI RIDGE: Okay, this is going to be a cost, and this is an old rate sheet. So this is just, for example, purposes only. All right. So these are the rates, and then below. Here is the matrix in which that they have all those Llpas you'll notice. See these positive and and negative numbers here.

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CAELI RIDGE: So you'll also notice here adjustment to price. If this were to say adjustment to rate, these Llpas would be an addition or a subtraction to the actual interest rate.

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CAELI RIDGE: it says adjustment to price, because it is to the premium that will be associated with the rate. All right. So the first thing that I'm going to do

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CAELI RIDGE: so I'm gonna identify what my loan to value is my L TV. And that's gonna go across this row right here. Okay, it starts at 50

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CAELI RIDGE: and below as an Ltb, 50.0 one to 55 is another bracket of Ltv, another column.

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CAELI RIDGE: 50 55 to 60, 60 65. So on and so forth. Okay, so we're going to say in my example that we're starting at a 75%. Ltb, so I'm going to be right here. So I know that I'm going to follow this column all the way down, and if you'll notice all the way down here, or all of those associated Llpas, so I've got to figure out going from, you know, left to right. Which one of these applies to me and my scenario.

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CAELI RIDGE: all right. So let's just kinda I'm just gonna make this up off the top of my head. So here we are, and here my credit scores that I have to work with. So in my example, I'm going to say I'm going to try and keep this easy for myself, so I'm not trying to have to crunch numbers or do math.

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CAELI RIDGE: I'm going to say that

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CAELI RIDGE: my client has a 760 credit score. Okay? So I'm gonna start here. I'm gonna take it all the way over to my 75%. It's a 0 point 0 0. There's no hit for that individual. Okay, so let's highlight that. So I don't lose my place.

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CAELI RIDGE: And this assumes that this is the kind of income that this individual is showing. You'll notice that there's some additional add ons down here. If they were less than 24 months of bank statements. Right? This is just the product. So this is the bucket that I found myself in. These aren't going to be applicable down this one, this one, this one, this one or this one.

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CAELI RIDGE: But now I gotta go back down here to all those other variables. So

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CAELI RIDGE: that to income ratio, my borrowers debt to income ratio is going to be under 40 under 50. Okay.

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CAELI RIDGE: but above 43. So I'm going to fall there. Another 0. This tells me that if it's in excess of 50 that they can't get this, the the Max is is 50%. Dti. You guys don't have to worry about that. Okay, next is my loan amount. So if you notice right here all the way to the left, the adjustments are going to be debt to income, ratio, loan, balance, purpose, occupancy, some of the things that I mentioned initially. So we'll go through these one at a time.

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CAELI RIDGE: So the loan amount in this case is going to be a hundred 75,000. Okay, that's my loan amount. So this one does apply to me. That is a a negative point 6 2 5.

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CAELI RIDGE: Let me highlight that guy for us, too.

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CAELI RIDGE: So I've gotta highlight that. Okay, that's the that's the Llpa for loan balance. This is going to be a cash out refinance.

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CAELI RIDGE: Okay, it's another point 6 2 5 cost.

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CAELI RIDGE: It is an investment property. Another 3, 8 of a percentage point.

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CAELI RIDGE: I'm gonna have to use my calculator on this.

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CAELI RIDGE: it is a 2 to 4 unit. Another quarter point.

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CAELI RIDGE: Okay, the state is is eligible. I'm not going to worry about that amortization. We're gonna say, it's a 30 year interest, only fine. Another 3. It's up a point. So you guys kind of start to get the the the premise here. I gotta go through all of these right now. We don't use a manual rate sheet. We have a a system that's got all the information in it. We plug in the variables, and it it fits out what the interest rates are and what the cost or credit would be if that was applicable.

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CAELI RIDGE: escrow waiver. No, no, no, okay. So I'm just gonna leave it there. So let's just go ahead and come up with our raw price. Okay.

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CAELI RIDGE: so let's go. Let's see if I can figure this out on my own. So there's 1 point. there's 2 and a quarter. So it looks like I've got 2 and a quarter in total costs.

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CAELI RIDGE: So if you guys want to follow along point 6 2 5 times 2. There's 2 of those right.

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CAELI RIDGE: There's 238,

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CAELI RIDGE: plus point 3 7 5 plus point 3 7 5 plus point.

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CAELI RIDGE: What was the other? One point 2 5?

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CAELI RIDGE: Okay, so 2, 2 and a quarter. When I say 2 and a half, I guess I got that wrong. Did I get them all?

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CAELI RIDGE: 1, 2, yeah, 2 and a quarter. So 2 and a quarter is the total raw. Llpa. Okay, those are my ads for the variables of this particular example, this particular transaction.

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CAELI RIDGE: you'll notice this is a non-qm product that I'm pricing off of

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CAELI RIDGE: that. If there were prepayment penalties, or you wanted to buy out a prepayment penalty. There's gonna be an additional cost there. So that's something else to consider. Pre payment penalties on. Non. Qm typically will give you better pricing anyway. So we have a 2.2 5 Llpa. So now, what I want to do for this, it's a negative number. Right? All of these are negative.

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CAELI RIDGE: Let me see if I can give you a quick example of where we could have benefited in in the right somewhere, so let's say, to get a 780 or better credit score in this example, I'd be able to take a quarter off. So, instead of it being 2 and a quarter

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CAELI RIDGE: right? It's going to be 2%, because I have an improvement for this particular credit score. That's a positive number

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CAELI RIDGE: hopefully, you guys are following. But that's not my case here. 2 and a quarter is my raw Llpa. So now what I'm going to do with this information is, I'm going to come back over here to the 30 year fixed column of rates.

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CAELI RIDGE: and what I'm looking for is the yield spread the interest rate that is got a yield spread of at least 2.2 5. There it is right there.

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CAELI RIDGE: So what this means is that this particular interest rate of 8.6 2 5 based on these valuables, these values values, this bank statement, loan product and Yadda Yadda Yada.

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CAELI RIDGE: that that particular part rate

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CAELI RIDGE: 2.2 5. This is a yield spread 2.2 5. What happens to my negative? 2.2 5 from down here, my my Llpas, when I add a positive 2.2 5 yield spread premium for this particular rate on a 30 year, fixed

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CAELI RIDGE: negative, 225 positive. 2, 2, 5. What happens? That's a 0 right?

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CAELI RIDGE: That's a par rate. So in that example, any any of you that work with us or have worked with us. You know that ridge charges 2% origination

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CAELI RIDGE: on all of our non-owner-occupied deals almost without exclusion. That means that 8.6 2 5 interest rate.

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CAELI RIDGE: you're going to be paying 2 points, because that's my compensation.

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CAELI RIDGE: There is no extra premium pricing here. This is called a par rate. Okay, now let's just say that you didn't want to pay any points.

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CAELI RIDGE: All right. You didn't want to pay our our 2 points origination. You wanted to try and build it into the interest rate. Well, if you know that we charge 2 points, and your Llpas are 2.2 5.

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CAELI RIDGE: That means that we've got to find an interest rate that is paying a yield spread of 4.2 5.

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CAELI RIDGE: Okay. Unfortunately, in this case there is no such

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CAELI RIDGE: option.

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CAELI RIDGE: So the best that I could offer you in this scenario would be 9.7 5,

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CAELI RIDGE: and you'd be paying 5 8 of a percentage point right? Because I still have to cover my 2.2 5. That leaves me

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CAELI RIDGE: right. If I if I take 2.2 5 away from forget about the one and the 0 here, it just that makes it confusing the spread. You'll spread premium. Here is 3.6 2 5.

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CAELI RIDGE: Okay.

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CAELI RIDGE: so if my Llpas in this case, or 2.2 5, I have to subtract 2.2 5 from 3.6 2 5.

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CAELI RIDGE: Everybody with me. Is there any questions, Carly, that that I might need to pause for

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Karlie Libby: and side of the spreadsheet

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Karlie Libby: up on the right hand side. Good!

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CAELI RIDGE: thank you for the question I don't know if that's you. Jg, but thank you. So a 30 day lock is pretty traditional. there is no hit for that. If you the longer the lock period, the the higher the cost and or the rate.

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CAELI RIDGE: Okay. So if you want to take an interest rate and secure that rate for a longer period of time. As you can see, you can expect to pay or secure a higher interest rate. So these negatives are an increase to the Llpa. These are price adjustments, not rate adjustments.

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CAELI RIDGE: likewise a shorter lock term usually will give you some kind of benefit. In this case. This particular R. Sheet doesn't offer anything lower than a 30 day, but conventionally.

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CAELI RIDGE: you know, you've got 1530, 45, 60. We can even lock as as high as 90 days. But there's an additional cost for it. But the longer the lock period.

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CAELI RIDGE: the higher the rate and or cost. Okay? Good question. okay, so

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CAELI RIDGE: let's let's go back to where I was. So if this individual didn't want to pay any points, I wouldn't give them, I wouldn't be able to give them that that offering today it's not available. The best that they could go get would be 9.7 5. And if I want to make my 2 points, and I know my Llpas are 2.2 5.

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CAELI RIDGE: Well. 4% minus 3.6 2 5 3 8. Oh, but we had a quarter. I'm sorry there's a quarter in the Llpa. Yeah. So I was right. 5 8 of a point.

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CAELI RIDGE: So let me, I'm gonna say that one more time, because I think I just confused everybody.

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CAELI RIDGE: So remember our Llpas loan level price adjustments for this scenario for this random old school rate sheet were 2.2 5. Okay, Ridge is going to charge 2% origination. So there's 4.2 5. I got to cover somewhere

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CAELI RIDGE: in this rate sheets case, I don't have a 4.2 5. Right? I'm short.

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CAELI RIDGE: I'm short point 6 2 5 or 5 8 of a percentage point to get that person there. But it's better than maybe paying the the the 2% origination. Maybe that makes more sense to them based on the deal etc. So in this example they could, I could offer them 9.7 5, and instead of paying our 2 points, origination, they'd only have to pay point 6 2, 5, or 5, 8. Everything in mortgage, especially when we start talking most often not always, but most often, interest rates and Llpas and stuff. They move in eighth of a percentage point numbers. So you start at 0 point 1 2 5.2 5.3 7 5

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CAELI RIDGE: half a point or point 5.6 to 5.7 5.8 7 5 and one whole point. Right? They they move in eighth of a percentage points. okay.

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CAELI RIDGE: So

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CAELI RIDGE: I'll let me pause for questions. Anything that that's timely currently about what I'm talking about here.

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CAELI RIDGE: No questions at the moment.

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CAELI RIDGE: In reality, we we have systems that, like I said before, we type in all of the variables of the transaction.

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CAELI RIDGE: and that will tell us what the pricing is for that day. And when I get the grid, that kind of looks like this, all of the numbers that come back. Okay, whatever the interest rates are, they're all. Sub. 100.

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CAELI RIDGE: Okay, depending on the variables of the deal. I I can't say exactly until I I ran it.

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CAELI RIDGE: but there is no premium pricing that is producing positive numbers here, especially for investment type properties. So as a result of that, there are points additional in addition to what ridge is compensated right our 2 points. that you're going to have to pay just to get in the door, just to lock in that interest rate. Nonlinear, occupied in particular is going to be on the higher end of what those Llpas are, or

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CAELI RIDGE: these numbers are going to be more significant below that 100 mark. Okay, if it comes back, and it says that the for the rate that you want, let's say the rate that you want is 7. Okay, this number could be well, in this case, it's it's 98.5. So what that means is that just to get this rate and forget about our 2 points that we're going to charge is going to cost you one and a half points

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CAELI RIDGE: right? Because I have to get to a hundred

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CAELI RIDGE: to make that what we call again par. So one and a half, plus 98.5 is a hundred right? And that's what that's where the cost for this particular rate for these particular variables

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CAELI RIDGE: would put us. Now. Okay, that would be if there were no Llpas. Okay, I was just showing you what what the difference between 7 and 98.5 min

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CAELI RIDGE: without any Llpas, it would be a point and a half.

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CAELI RIDGE: Okay, now I have to take my point and a half. If you wanted 7, I have to take one and a half and add it

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CAELI RIDGE: to 2.2 5, where we at 3.7 5 plus my 2 points. We're at 5.7 5

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CAELI RIDGE: in this scenario, just to get

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CAELI RIDGE: that 7% rate.

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CAELI RIDGE: Now, what you'd want to do in this case, because there, there might be other options, is figuring out what your payment difference kind of going back to that first example I gave you in that math. How far do you want to pay it down?

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CAELI RIDGE: Loan amount is a big driver here, too. The smaller loan sizes generally. Thing don't make. I used to 100,000 is my example on the front end of this call, because it's easy math. Okay?

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CAELI RIDGE: The larger loan sizes

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CAELI RIDGE: make a bigger difference. An eighth of a percentage point on half a million dollars is going to be a damn site higher than $8 a month difference in payment.

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CAELI RIDGE: So as I'm always harping on. You guys have to do the math. If you have those baseline details, how long are you going to keep alone?

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CAELI RIDGE: What is the interest rate, and and the points associated at your quote. And what are the buy down rates? What are the costs to get the rate even lower? And what is the monthly savings, and you can figure out from that point on whether it makes sense to to pay even more points.

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CAELI RIDGE: comments, questions about any of this.

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CAELI RIDGE: Let me here, hold on. Let me stop sharing. I want to look at some of the faces here and see if we've lost anybody, or if if people are either sleeping or they're like, what the Freak is this girl talking about?

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CAELI RIDGE: Okay, everybody's got their pictures on. Lisa looks good. She's she's following.

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CAELI RIDGE: There's there's you. It's just a smiling at me. He's catching all this, all right. So if you guys have any questions, let me know. Okay.

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CAELI RIDGE: so let's talk about. Why? Why, why are there points right now? Many of you may have the answer to this. if anybody is feeling ambitious, and wants to to raise your hand and say I'll answer it. I'm Mike. You've got the mic. I'll let you answer

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CAELI RIDGE: In the meantime. let me explain. So everybody knows we're in a high rate environment right now. Right? Rates are high right now, that's where we are in this particular cycle

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CAELI RIDGE: inflation. All of the reasons that are associated with why we are where we are. Pandemic. Yadda! Yadda! Yadda! Yadda, yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda! Yadda! Yadda! Yadda! Yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yadda yada okay. Rates are high.

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CAELI RIDGE: When rates go up, do they stay up?

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CAELI RIDGE: No, when rates are down and go down, do they stay down? No, they're fluid, they go up, they go down and everything in between.

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CAELI RIDGE: When we look at where interest rates are going to be in the next 6 months, or 12 months or 18 months. It is widely anticipated that interest rates are going to be coming back down. They've been up for a while. They're not going to stay there.

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CAELI RIDGE: Predicting when that's going to happen is not going to be part of this conversation, but I think that it's a foregone conclusion that that some time in the relatively near future, and I guess it depends on how you define near future. Let's say a year rates are going to start coming back down.

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CAELI RIDGE: As a result of that.

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CAELI RIDGE: the servicers. Okay, here's another layer of complication and and convoluted explanation. That kind of plays into the why there is no premium pricing right now. let me let me back up the step.

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CAELI RIDGE: So

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CAELI RIDGE: we talk about mortgage, back securities, and most of you know that Ridge lending is a direct lender. In that we fund on our warehouse line. We underwrite in house, but we don't hold these mortgages and service them, meaning when you guys start sending your mortgage payments in to be paid and distributed to the investor for the principal and the interest and the taxes go to the county and the insurance goes to your agent. We don't handle that.

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CAELI RIDGE: Okay, we don't service these loans. What we will do is we're gonna bundle mortgage back securities and in chunks of 5 million or 10 million, or whatever it is. And we're gonna resell them on the secondary market to investors to services. The services are gonna pick up the rights

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CAELI RIDGE: to service this portfolio of mortgage backed securities, and as a result of that, they're going to pay a premium

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CAELI RIDGE: on that on that, the rights to service. Okay? Usually it's 1%. All right.

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CAELI RIDGE: So whatever the the the value of the mortgage back security is being purchased. They're going to use one typically and purchase the rights to service in mortgage. It takes about 36 months to recapture

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CAELI RIDGE: the cost that upfront costs service, or pays for the rights to service that that loan. So it's going to be about 3 years down the road before that company before that entity is going to be profitable.

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CAELI RIDGE: hey? They're hedging, because after 36 months, then they're going to be more Prof. They're going to see a profit on the work and the servicing that they're doing within those mortgage back securities. Well, okay, that's fantastic.

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CAELI RIDGE: But they know they have.

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CAELI RIDGE: Well, they've got 2020 hindsight. They know that interest rates that are high today are going to be refinanced tomorrow, and probably much, much sooner than their 3 year or 36 month break. Even

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CAELI RIDGE: so, if they know that these loans are going to refinance because rates are high right now, and the loans that they are, they're buying today the servicing rights today. They're not going to have 36 months down the road, right? They're going to refinance and pay off

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CAELI RIDGE: because rates are going to be coming down. You guys are probably a lot of people are going to be refinancing out of the rates that they they got today last month last year into a lower rate in the coming 12 months.

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CAELI RIDGE: What does that mean? They're going to be out that initial capital.

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CAELI RIDGE: right? That premium that they paid for those servicing rights. So that's why there's no premium pricing right now. And that's why you're paying extra points. They've got to cover that margin for the losses that they're going to be taking

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CAELI RIDGE: in 6 months or 12 months or 18 months clear as mud. Right? How you guys doing?

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CAELI RIDGE: All right, I'm gonna I'm gonna mandate. Sometimes you guys are gonna have to to get off off your

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CAELI RIDGE: your static images. I want to see your faces, especially when I start talking about crazy stuff like that, just to make sure that nobody is going into a a a coma or

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CAELI RIDGE: did say that this was a great. This is a good breakdown. And and, Martha, you know, she said, I will need to watch this again. So it's it's it's high, high-level stuff gang.

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CAELI RIDGE: and it's not super easy to to assimilate with and and certainly retain. You're gonna want to hear it again and again and again, and and watch it. And if there was anything about today's conversation that needs further explanation, you know how to get us. Let us know. We'll add it to our weekly topics. But let me let me open up for questions. Anybody have anything.

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CAELI RIDGE: I see a few deer in the headlights, not not Phillip looks good. He looks like he got he got most of that. He's looking. He's looking sharp. There's Dad.

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Karlie Libby: I do have one question here, Jaylee. So

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Karlie Libby: that's why we are paying extra points, or that's what lock fees are.

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CAELI RIDGE: Same thing.

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CAELI RIDGE: lock fees and extra points. Same same right? I mean, we call them lock fees. It's probably not a a great descriptive for for what you know it actually is. It's just the length, language barrier. Probably we call them in in our world. But those lock fees are that that lack of premium pricing, or the lack of spread when we do the the math to figure out the Llpa.

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CAELI RIDGE: and what the rate, if there's there's no yield. So when I showed you guys, let me just do it one more time. Hold on

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CAELI RIDGE: So when you look at this, this is old, I you can't get these very often anymore, this, this kind of a rate sheet. Right? Everything is automated. So when you guys see premium pricing, this is premium pricing. Technically, this would be premium pricing.

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CAELI RIDGE: Forget about the Llpas for a second 8.3 7 5 is paying a premium. Okay.

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CAELI RIDGE: depending on what the scenario, the the variety of variables, are attached, positive or or negative, to that particular interest rate.

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CAELI RIDGE: not very often are you even seeing any premium pricing even for owner, occupied a lot of times having that choice to increase the interest rate to cover the spreads. Whether that be the lenders compensation, or the Llpas, or what have you? It isn't available for the reasons that I just described.

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CAELI RIDGE: because the servicers know they're gonna be taking losses and probably pretty big losses when all of the loans that were secured in the last 12 to 18 months go to refi, and many of them will not, all of them, but many of them will.

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CAELI RIDGE: and that upfront premium they paid for the servicing rights will not have been profitable, they'll be in the red. So they are not producing that premium, pricing

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CAELI RIDGE: any more questions.

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CAELI RIDGE: Don't be shy. No dumb questions here. Gang. Remember, I've been doing this for 25 years and I still learn something new, almost daily.

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CAELI RIDGE: Nothing. Okay. Does anybody have nothing, Curly?

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Karlie Libby: Oh, it looks like we just got one. Let's see here. Okay, so do the negative. Llpa. Subtract from your 2%.

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CAELI RIDGE: No, you would add them to, because it's it's a cost. So if you think about premium pricing as a a positive number.

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CAELI RIDGE: right? If if

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CAELI RIDGE: the yield spread on an interest rate we want, if it was a positive number.

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CAELI RIDGE: It's got to cover the Llpas right? Associated with the variables of of your transaction, Philip, plus

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CAELI RIDGE: our compensation.

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CAELI RIDGE: Now, under normal market circumstances. Okay, forget. Try to put everything I've set aside just for a second and under normal market circumstances. the advice that we give most of our clients on a buy and hold strategy

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CAELI RIDGE: totally different conversation for a shorter term investment, or some kind of a fix and flip you probably

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CAELI RIDGE: want to pay additional points when interest rates are low enough, and we know that you're not going to be refinancing or refinancing within the window of time, that that math that break, break even math is there?

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CAELI RIDGE: The math is easy enough to identify by saying and and keep in. Mind, you guys, the pricing changes daily. So what might be viable to buy points down today in a normal market environment may not be tomorrow, right? But then the next day it might be viable again. So it's it's changing constantly. but, Philip, it's it's adding to. So if the Llpa is a negative number.

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CAELI RIDGE: then

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CAELI RIDGE: our points are being added to that. If the Llpa is a positive number, let's say that the loan level price adjustments for your scenario come back and you have a a positive half a percent.

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CAELI RIDGE: And we charge 2.

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CAELI RIDGE: Then in that case we'd only be charging one and a half, because based on that interest rate that we have chosen. That half positive is going to cover half of our 2 points, that we're going to charge

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CAELI RIDGE: right? Or what we could do instead, is, look at the right below that.

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CAELI RIDGE: and see if you're really looking for that that power rate right where the interest rate yield and the Llpas match as close to as possible

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CAELI RIDGE: and make that 0. And then you're paying the 2 points. Origination or right. However, that ends up shaking out.

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CAELI RIDGE: Anything else? That question, Philip. Thank you. We do have a couple more. So Edwin asks. Sorry if I missed it, but what our current rates looking like up, I assume

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CAELI RIDGE: they are up. Thank you, Edwin. I you guys know how much. Thanks, Buddy. yeah, they're up I'm gonna say, but remember. So this is subjective to the Llpas right? And I'm I'm constantly because everybody. So I'll tell you, and we kind of have a joke in our industry. I'll give you guys a little bit of insider. fodder, you know. Comedy, relief, comic relief.

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CAELI RIDGE: first thing on the phone. What's the interest rate right before we even had anything else to to talk about. We have no information. What's your rate? What do you want it to be? so it's very, very dependent on? What are the Senate? What's the scenario? What's the loan amount? What's the occupancy? What's your credit score? What's the property type? Is this a cash out? Is it a purchase. Once we've been able to identify all of that, we're able to give at least a range or a good baseline, as it would be that at that point in time of the day that day, etc. So

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CAELI RIDGE: that said, Let me quantify first, and then I'll give you where the range is okay, Edwin.

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CAELI RIDGE: let's say it's a purchase. Let's say it's 2425 down. And let's say that loan amount is 100 grand to 150, if you guys remember, on that sheet they they go in tears. Right? So the Lt.

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CAELI RIDGE: Excuse me. The Ltv. Is 50 to 55, 55 to 60 right? And then, if you remember, the loan amounts also, they have the tiers. So let's say that in my example again, 100,000 to 150 is the tier. That's your within that range. 7, 60 are better credits.

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CAELI RIDGE: and I said it was a purchase. It's an investment property, a single family residence. Dti is below 43%. So all of those variables you're probably today going to be at about

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CAELI RIDGE: I'm going to say 7 to 7 and a quarter. I think I should probably have pulled this up while I was talking to you guys.

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CAELI RIDGE: I'm going to give you that as the range, and they probably are additional lock fee points. Or, in addition to our 2 points, there's probably additional points associated with that interest rate quote.

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CAELI RIDGE: and there's going to be a cap, too. there's no, there's some something else called off sheet pricing where the secondary markets are going to give us kind of that rate sheet, and the rates will cap, and they won't go go above, say, 7 and a half right.

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CAELI RIDGE: which I think is lame. I think they should give us the opportunity and and find, take the higher interest rate, and adjust that premium a little bit. So people have more flexibility and and room to make, you know more decisions. But

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CAELI RIDGE: If it's capped at 7, and there's no room above that, there's nothing else, because, remember, the higher the rate.

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CAELI RIDGE: the higher the rate, the higher the yield spread premium or the lower

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CAELI RIDGE: the cost. Does that make sense? Let me let me share my screen one more time, you guys, the higher the interest rate. Where's my share?

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CAELI RIDGE: The height. So the lower the rate is up here. Right? You guys can see me. So 6.6 5 is the lowest rate. On this rate, sheet 9.7 5 is the highest rate.

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CAELI RIDGE: so the higher the rate. the higher the yield spread the lower the rate. the higher the cost. the further away from that 100% or par

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CAELI RIDGE: that we're going to get

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CAELI RIDGE: okay.

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CAELI RIDGE: And that's true, not just for this rate sheet for any, for any. The the lower the rate, the higher the cost.

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CAELI RIDGE: the higher the rate. Usually we we expect the the higher, the the premium, which we don't really have access to right now.

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CAELI RIDGE: And you know why.

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CAELI RIDGE: that was a ton. I hope you guys were able to track and follow some of that. I I hope I didn't overstep my bounds by offering information that might be, you know, way over and above what you ever really need to know or wants to know.

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CAELI RIDGE: but I I hope you got some value out of it. Anybody want to. Well, we've got a minute left. because I book this through 2 30. Anybody wanna ask any questions about topics or or offer any ideas about topics for next week, the week after anything that you want to hear about or talk about. I was thinking next week I would talk about some of the advantages and disadvantages of

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CAELI RIDGE: amortized mortgages versus revolving, open-ended, close-ended, amortized. versus open-ended revolving.

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CAELI RIDGE: as it relates to investment property. So I thought I would I would talk about that. Could we get a copy of that spreadsheet to digest? Maybe. we're not. It's not for public consumption. I'll see if there's there's stuff on there. If I can get rid of anything that might get me into trouble.

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yes, I will make it available on the on the the community. And you guys can have access to it. Yeah, I'm sure that there's some way I can. I can

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CAELI RIDGE: redact anything that would be sensitive. And you guys can get your hands on that. And then I ask, follow up questions.

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CAELI RIDGE: so yeah, I was thinking about amortization versus revolving open ended mortgages and and pros and cons, and talking about that next week, or I could talk about again. I thought this would be a good rerun. I recently have been having some questions about borrowers wanting to get into a 15 year fixed mortgage, which I am a huge deterrent of

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CAELI RIDGE: I'm never, ever, ever, gonna allow any of my clients to to take a a shorter amortization mortgage unless you know, they're cracking in a hundred $1,000 a month in income, and their debt to income ratio is like a a 1% right which

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CAELI RIDGE: I don't have any clients like that. so I we could do that too. So my point is, let me know if you guys have any of the thoughts, otherwise I'll figure out what we want to talk about. And and you guys get to just

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CAELI RIDGE: enjoy.

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Karlie Libby: Yeah, we got some here. I'm from Katy, she said, how to underwrite deals in this environment and also use this had a question. he heard on bigger pockets. But some lenders will use your existing assets as collateral. is that something that we offer

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CAELI RIDGE: existing assets as collateral. Tell me what you mean. You just you mean as income like a like an asset depletion. Or do you mean if you're trying to do a commercial loan and the Ltv just on the real property by itself isn't making the spread, and you've got assets over here that you can kind of add into the mix to make the the deal more sound from a banking perspective. Is that what you mean?

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Karlie Libby: I'm gonna go ahead and unmute you uses so you can go ahead and answer us.

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Karlie Libby: Let's see here.

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CAELI RIDGE: I can hear you

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Eustace Ottey: great thanks for taking my question. So on the bigger pocket show a few weeks ago. there was, the guys that that he had an existing property that he owned, which did not have a mortgage on it.

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Eustace Ottey: and the lender allowed him to use

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Eustace Ottey: property has collateral without refinancing it, or anything to take out a mortgage.

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CAELI RIDGE: I think I know what you're saying? The answer is, yes, we have products that will. Let's say, for example, you have you found some properties? You found a a

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CAELI RIDGE: a package of 3 properties that

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CAELI RIDGE: you would like to purchase and the down payment. You're a little bit shy in your actual cash. So you're gonna add in this free and clear property as collateral.

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CAELI RIDGE: to offset what you might be deficient in the the 20% or 25 down. Is that right?

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Eustace Ottey: yes, but in in the example that he gave he didn't put any of his own money down. So it's not that he was short on cash. He didn't have put any cash down.

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CAELI RIDGE: If the equity in the property, the the screen, clear property is enough using a a cap in loan to value. So let's say that let's say that that

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CAELI RIDGE: he needed $80,000 for the down payment, and all in, etc. Blah blah blah!

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CAELI RIDGE: And the property that he had over here was worth a hundred $1,000, and the limit is 80 that they will

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CAELI RIDGE: leverage. Or

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CAELI RIDGE: yes, you can absolutely do that. Yeah. And we have products that can accommodate that as well. And speaking of bigger pockets, you guys just heads up. I don't know if I told you this last week or the week before. I'm kind of excited. I am going to be featured as on a lender panel. I can't remember the name of it. But I think it's the eighteenth, right? Currently. Isn't that when they're they're publishing that, let's see. Yes, that is, on Tuesday, the eighteenth. So

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CAELI RIDGE: I'll be on bigger pockets.

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CAELI RIDGE: I'm embarrassed to Sam. I'm totally spacing the other guy's name. Very cool, very smart, Guy, but it might be worth you checking out so it will. Obviously, when we get access to it, we'll we'll blast it across our airwaves, too, so you'll know from us when it's out there. But

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CAELI RIDGE: yeah, okay. Who else? Anybody else in just quick last minutes, Curly, that had anything we didn't catch?

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Karlie Libby: No, just some. Thank you for the great info and for the talk. And

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CAELI RIDGE: I think we caught all those questions sweet. I'm gonna go finish my pie.

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CAELI RIDGE: So you guys, I'll see you guys next week. Thanks for coming. Hi, gang!

Calling All Real Estate Investors

To Pay or Not to Pay Points, That is the Question

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