Lenders generally offer borrowers alternative combinations of interest rate and points: Low rates are offered when the borrower pays points to the lender, and high rates are offered when the lender pays points to the borrower. Points paid by the borrower are an upfront cash outlay, whereas points paid by the lender are used to pay the borrower’s settlement costs. On a 30-year fixed-rate mortgage (FRM), a lender might offer 10 or more combinations.
Borrowers frequently don’t choose the combination that is best for them for the same reasons they often don’t select the best type of mortgage: their own ignorance, poor advice, and inadequate disclosures. Some borrowers don’t understand that there is a choice to be made, and their loan provider (loan officer or mortgage broker, henceforth LP) may have no interest in taking the time to explore an issue that can be avoided.
One way to avoid it is to simply steer the borrower toward the rate that carries zero points — or close to it. While steering borrowers toward a mortgage that carries a larger commission for the LP is now illegal, it is not illegal to steer a borrower toward the mortgage that involves the least time and effort for the LP.