With rates rising, loan points poised to rebound

I’m thinking of a word. Five letters.

Here’s a hint: If it’s attached to your mortgage, it means your loan is going to cost you more than just the interest and the usual fees. And if you’re a home buyer younger than a certain age, you probably won’t guess this word in a million years.

The word is “point,” and unless you were in the home-buying game in the 1990s or earlier, you probably don’t know what I’m talking about. Usually expressed in plurals, points essentially are a surcharge that a borrower pays to get a lower mortgage interest rate. Typically, a point equals 1% of the value of the loan. In the days before interest rates got so tiny that points almost disappeared (that is, before the recent housing boom), they were commonplace.

It’s a little too early to shout, “They’re back!” But get ready.

“We’ve seen this increasing prevalence of points being quoted again, just over the last couple of weeks,” said Keith Gumbinger, vice president of HSH Associates, a New Jersey publisher that tracks mortgage rates nationwide. Gumbinger said points started popping back into view when rates crossed the 6% mark, after years of hovering in “the fives.”

He predicted that we’ll cross over into the realm of 2-point loans when 30-year rates hit 7%, which is what some economists are predicting for late 2006 or early 2007.

Paying a point can lower a rate by one-eighth to one-quarter of a percent, he explained. As late as the 1990s, it wasn’t uncommon to hear lenders quote rates with up to 3 points attached. Not that there’s any legal cap or technical reason for the 3-point limit, Gumbinger said. Beyond that, consumers usually aren’t interested.

“It’s a matter of practicality, from the borrower’s standpoint,” he said. “They ask themselves: ‘Do I have thousands of dollars lying around?’ ”

In an era when so many consumers have managed to become homeowners only by virtue of low-down-payment and no-down-payment loans, having the cash for multiple points is not very likely.

Thirty-year loans in the ballpark of 6% today are still historically low -- especially when compared with the 18% rates in the 1980s. But for a new generation of buyers, rising rates with points attached could have a chilling effect. “For borrowers who came into home buying at a certain age -- well, I’m not even sure what that age is, but it’s young -- this represents uncomfortably high interest rates, when you’re used to seeing fives,” Gumbinger said. “Rates aren’t high yet, but they’re approaching three- or four-year highs.”

Points do have their positive sides -- sort of. For buyers, they’re tax-deductible in the year they are paid. Refinancers who pay points can deduct them too, but they have to be amortized over the life of the loan. And in the olden days, when buyers found themselves in a really slow market, points could be a favorable negotiating tool. Sometimes, desperate sellers would offer to pay the points, just to get the deal done.

A really slow market -- that’s hard to imagine, isn’t it?