Should I Pay Points to Reduce My Interest Rate?
Darren Meade
January 23, 2007
Should I Pay Points to Reduce My Interest Rate?
A common question among borrowers is 'Should I pay Points to Reduce my Interest Rate?'
In this report, we'll discuss this topic in detail and show you how you can determine if paying points is the right decision for you. Let's get started!
What are Points?
In their simplest form, Points are up-front mortgage interest fees paid on a loan to reduce the initial interest rate. Points are fees the borrower pays the lender at the time of loan closing. If you pay one point (1%) on a $100,000 loan, then you will pay the lender $1,000 at loan closing.
Most people pay points to reduce their long-term loan interest rate. For example, if you are taking out a loan, and the lender says you qualify for a 7.25% interest rate, it may be possible to reduce the interest rate to 7.0% or less by paying points. This is similar to making an investment. You monthly payment and total interest over the years will be reduced by paying points.
Am I required to pay Points?
First, it's important to understand that you are not required to pay points. It's your decision.
If you watch TV or read the newspaper, you might have thought you were required to pay points. The rates you see in the newspaper and on TV are usually expressed as a loan rate and points (i.e. - 6.75% and 2 points). But most lenders will be willing to remove points and simply charge a higher interest rate instead.
Should I pay Points?
Most lenders offer loans with 0 points. This may seem attractive at first, but you need to calculate how expensive a 0 point loan will be over time, because it's quite possible you could obtain the same mortgage with a lower long-term interest rate, by paying a couple of points.
The main factor in deciding whether or not to pay points is the length of time you plan to live in the home you are purchasing or refinancing. As a general rule of thumb, you should only pay points if you plan on keeping the mortgage for more than 4 years. Because points are prepaid interest, you need to be sure you will keep the loan long enough to recoup these costs through lower monthly mortgage payments.
Tax Advantages
Another consideration you should take into account is the potential tax advantage that points represent. If you are purchasing a home, any points that you pay up-front are immediately tax-deductible. If you are refinancing, however, points ARE NOT tax-deductible and must be amortized over the life of the loan.
How to Make Sense of This
Take this short pop-quiz to see how prepared you are to make an informed decision on your next purchase or refinance:
1.) Should I pay points or not?
2.) Since there are hundreds of loan programs, how do I know which one is best for me?
3.) How can I tell if I am getting the best rate?
4.) How will the choices I make with now affect me 10-15 years in the future?
5.) Which loan choice will allow me to have a better retirement or money for my child's college education?
If you are unsure of the answers to any of these questions, you should seek expert advice for a knowledgeable, respected lender.
Your home purchase or refinance will be one of the largest financial transactions you will ever be involved in and the choices you make now could affect you for years to come. This is why we offer a NO-COST, no obligation 'Borrower Coaching Session' to help people just like you get answers to the most important questions.
We put our experience to work for you, preparing you to make an informed decision that could save you thousands of dollars.
Why? Simple - if we do a good job helping you prepare, maybe we can earn your mortgage business. We are sure willing to try. Are you willing to spend 30 minutes with us? If so, please visit our website to request a 'NO-COST Borrower Coaching Session'.
Visit my website at: http://www.freemortgageinformationsoutherncalifornia.com or contact me at 866-676-4325.
A common question among borrowers is 'Should I pay Points to Reduce my Interest Rate?'
In this report, we'll discuss this topic in detail and show you how you can determine if paying points is the right decision for you. Let's get started!
What are Points?
In their simplest form, Points are up-front mortgage interest fees paid on a loan to reduce the initial interest rate. Points are fees the borrower pays the lender at the time of loan closing. If you pay one point (1%) on a $100,000 loan, then you will pay the lender $1,000 at loan closing.
Most people pay points to reduce their long-term loan interest rate. For example, if you are taking out a loan, and the lender says you qualify for a 7.25% interest rate, it may be possible to reduce the interest rate to 7.0% or less by paying points. This is similar to making an investment. You monthly payment and total interest over the years will be reduced by paying points.
Am I required to pay Points?
First, it's important to understand that you are not required to pay points. It's your decision.
If you watch TV or read the newspaper, you might have thought you were required to pay points. The rates you see in the newspaper and on TV are usually expressed as a loan rate and points (i.e. - 6.75% and 2 points). But most lenders will be willing to remove points and simply charge a higher interest rate instead.
Should I pay Points?
Most lenders offer loans with 0 points. This may seem attractive at first, but you need to calculate how expensive a 0 point loan will be over time, because it's quite possible you could obtain the same mortgage with a lower long-term interest rate, by paying a couple of points.
The main factor in deciding whether or not to pay points is the length of time you plan to live in the home you are purchasing or refinancing. As a general rule of thumb, you should only pay points if you plan on keeping the mortgage for more than 4 years. Because points are prepaid interest, you need to be sure you will keep the loan long enough to recoup these costs through lower monthly mortgage payments.
Tax Advantages
Another consideration you should take into account is the potential tax advantage that points represent. If you are purchasing a home, any points that you pay up-front are immediately tax-deductible. If you are refinancing, however, points ARE NOT tax-deductible and must be amortized over the life of the loan.
How to Make Sense of This
Take this short pop-quiz to see how prepared you are to make an informed decision on your next purchase or refinance:
1.) Should I pay points or not?
2.) Since there are hundreds of loan programs, how do I know which one is best for me?
3.) How can I tell if I am getting the best rate?
4.) How will the choices I make with now affect me 10-15 years in the future?
5.) Which loan choice will allow me to have a better retirement or money for my child's college education?
If you are unsure of the answers to any of these questions, you should seek expert advice for a knowledgeable, respected lender.
Your home purchase or refinance will be one of the largest financial transactions you will ever be involved in and the choices you make now could affect you for years to come. This is why we offer a NO-COST, no obligation 'Borrower Coaching Session' to help people just like you get answers to the most important questions.
We put our experience to work for you, preparing you to make an informed decision that could save you thousands of dollars.
Why? Simple - if we do a good job helping you prepare, maybe we can earn your mortgage business. We are sure willing to try. Are you willing to spend 30 minutes with us? If so, please visit our website to request a 'NO-COST Borrower Coaching Session'.
Visit my website at: http://www.freemortgageinformationsoutherncalifornia.com or contact me at 866-676-4325.