Friday, August 26, 2011

Should You Pay Points on a Mortgage?

What Are Points?
Points are an up-front fee paid to the lender at the time that you get your loan. Each point equals one percent of your total loan amount. So, for example, 2 points on a $200,000 loan is $4,000, or 2% of the loan amount.

How Do Points Affect My Mortgage Rate?

Points and interest rates are inherently connected: in general, the more points you pay, the lower the interest rate you get. However, the more points you pay, the more cash you need up front since points are paid in cash at your loan closing. This is also known as a "buy-down" or a "discount" since you're paying for a reduced rate over the entire term of the loan.

Should I Pay for Points?
You don’t necessarily have to pay for points. Many of the rates you hear quoted in ads on the TV or radio may include points, but there are mortgages available without them. Keep in mind that the rate you get for a mortgage without points will be higher than a rate with points.

Deciding whether or not to pay for points depends on your situation.
Do you want to pay for more points in exchange for a lower rate, or do you want to pay fewer points and accept a higher rate?The answer usually depends on how long you expect to own your home and how you like to budget your money.

If you don't plan on owning your home for very long, buying points may not be your best option. The length of time you have your mortgage determines how much interest savings you can achieve from a lower rate. On the other hand, if you plan on owning your home for a longer period of time, the money you pay up front for points could be more than made up for in interest savings over the term of your loan. Another consideration when deciding to pay points is how much money you want to bring to your loan's closing versus how much you would like to lower your monthly payment. While points are paid for at closing, a lower interest rate will reduce your mortgage payments every month.

Your decision should be based on how long you’ll have the mortgage and how you prefer to manage your budget. The longer your mortgage term, the more you’ll benefit from having a lower rate.

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