by Francine L. Huff
Old House Web Columnist
It may be to your advantage to pay points, or "buy down" your mortgage interest rate when buying a home. Paying points can help you get a lower interest rate, which will decrease your monthly payments over the life of a mortgage loan.
How Points Are Calculated
Points are fees paid to a lender at closing to lower an interest rate. A point is equal to 1% of the mortgage loan amount, so if you have a $100,000 mortgage and want to pay one point, you'd pay $1,000. Points are charged by lenders to offer lower interest rates or more favorable terms, such as a lower interest rate margin on an ARM, or to waive a prepayment penalty.
The Longer the Better
Deciding whether or not to pay points on a mortgage loan depends on a couple of factors. First, determine how long you plan to stay in the home. If you plan to be in your house at least four years, paying points may make sense because you'll have a better return on your investment over the long run. A mortgage calculator can help you determine whether the difference in your monthly payment is worth the extra upfront expense of paying points.
Do You Have Cash Now?
Second, determine whether or not you actually have the cash to pay points at closing. Many lenders will offer to finance points by adding them to your mortgage loan balance. But not only will you pay a finance charge on those points, you'll also have a higher monthly payment.
Compare Mortgage Loans
Shop around for a mortgage since loan offers can vary from lender to lender. You can use the Old House Loan Finder to search for a lender that can help you compare mortgages with and without points.
Paying points on a mortgage may make sense if you have the cash to spare and plan to be in your home long enough to break even. Also, depending upon your tax situation, points paid on a mortgage may be deductible as home mortgage interest.
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