Mortgage Basics FAQ
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Does it make sense to pay more points for a lower interest rate?
5. Does it make sense to pay more points for a lower interest rate?
Whether to pay an upfront fee known as "points" in order to lower your mortgage interest rate can be a tough decision -- there you are, making one of the largest purchases of your life, and you have to come up with a few more thousand dollars by the closing. However, over time the savings in interest payments can be well worth that initial financial stretch.
One point is 1% of the loan principal; for example, if you were borrowing $250,000 at two points, you'd pay $5,000 up front. There is normally a direct relationship between the number of points lenders charge and the interest rates they quote for the same type of mortgage, such as a fixed rate. The more points you pay, the lower your rate of interest, and vice versa.
Before deciding whether it's worth paying points, factor in how long you plan to own your house. The longer you live there (or pay down the mortgage), the better off you'll be paying more points up front in return for a lower interest rate. You'll reach a break-even point, when you've worked off what you spent on the upfront payment via your monthly savings. On the other hand, if you think you'll sell or refinance your house within two or three years, it's a better idea to get a loan with as few points as possible, since you're unlikely to reach that break-even point.
A good loan officer or loan broker can walk you through all your options and trade-offs such as higher fees or points for a lower interest rate. Or you can check a site such as www.homes.com to quickly compare combinations of interest rates and points.