Make a Point to Lower Your Interest
On a test, students want all the points they can get, and even adults will brighten up at the promise of some of those proverbial “brownie points.” But in the mortgage world it is quite the opposite - people usually aren’t so thrilled about points. Mortgage points, also called discount points, are an up-front fee paid in cash to the lender at the time of closing. Points can also be rolled into the loan, but this will partially defeat the purpose of paying points in the first place because of the resulting increase in the mortgage rate. However, paying points also means that you are paying extra money upfront to lower your interest rate. Therefore, the question is this: Will it save you more money in the long run to pay a lower interest rate or to pay no points?
What’s the Point?
Points are paid to lower the interest rate—the more points you pay, the lower the interest rate you get, and correspondingly, the less interest you pay overall. One point is equal to 1% of the loan amount, and depending on the individual’s loan scenario, each point lowers the interest rate by approximately .125% to .25%. Borrowers benefit from points because paying points typically results in having lower monthly payments.
Let’s Get to the Point
So, when is it better to pay points in order to get a lower interest rate? The general rule is that if you plan on staying in the same home or mortgage for five or more years, then paying points will work to your advantage. However, if you plan on moving or refinancing your loan within five years, then your money may be better spent as an increased down payment or used for other purposes (Source: velocityloan.com).
Before you make a decision, analyze your situation and your plans for the future. Knowing what your future plans are will allow you to get the mortgage loan that best fits your needs.
Source: Informa Research Services