Tip:
Highlight text to annotate it
X
So you just finished running the numbers -- probably more than once -- to figure out the best mortgage
rate and terms for you. Your work is all done, right? Actually ... no. There's another step
you can take that could save you some money down the road or maybe make closing costs
a little more manageable - and that's looking at points.
So what's a point? Well, in the wonderful world of mortgages, a point is equal to one
percent of your mortgage -- so if your mortgage is for, say, $300,000, a point would be $3,000.
When you pay points, you're actually paying some of the interest on your loan ahead of
time in order to get a lower rate on your mortgage. Usually, paying one point will decrease
your rate by about a quarter percent.
Now, paying points can save you some serious money, as long as you stay in your home for
awhile. If you decide to sell in, say, less than five years, it may actually cost you
more to pay points than it would if you had just paid the original interest rate. The
time at which paying points actually starts to make financial sense is called the break-even
point. Depending on the interest rate and the number of points you end up paying, it
usually takes at least five years to break even.
Confused yet? Well just wait, 'cause there's more. You can also have negative points. Those
occur when you roll the closing costs into the cost of your mortgage. In that case, the
lender will raise the interest rate a little bit to make up for that privilege.
The best way to really understand points and whether they make sense for you is to use
a calculator like the one on LoanLove.com. Or, you can ask your lender how paying points
would change your monthly payments and the interest you'll end up paying. Wanna learn
more? Click the link below.