Do Points Equal a Lower Rate?

 

How do you "buy" a better rate?

Do you plan on keeping your loan for a while? Then it may make sense to "buy" a lower interest rate by paying one or more "points."   This is also something to consider when purchasing a home, as often asking the seller to pay points to reduce your interest rate would be more beneficial to you than a reduced purchase price!

Even if you're unsure of how long you plan to keep your mortgage before you move or refinance, paying points now for a lower rate may make sense. For example, do you have a high-paying job now but you think you might change careers in the next few years? I can help you sort it out. It's part of how I work to find the right loan for your means and goals.

A point -- which equals one percent (1%) of the total loan amount -- is an up-front fee that lowers your monthly interest rate and total interest due over the life of the loan. So, a one point loan will have a lower interest rate than a no point loan. Basically, when you pay points you trade off paying money later in favor of paying money now. You can pay fractions of points, meaning there are a lot of points packages that can make a loan's terms more favorable if that's what's right for you.

I will provide you with a side by side comparison report showing you the difference between paying points to lower your rate and obtaining a no points mortgage.  Depending on how long  you keep your home, this may save you thousands of dollars over the life of your loan.  The following is an example of what it might mean to you to reduce your interest rate with points. 

LOAN SUMMARY 30 YR FIXED RATE 30 YR FIXED RATE with 1 point discount Sales Price $500,000 $500,000 Down Payment ($100,000) ($100,000) Loan Amount $400,000 $400,000 Interest Rate 5.750% 5.500% Term 30 Yr. 30 Yr. Rate Type Fixed Fixed APR (est.) 5.801% 5.642% MONTHLY PAYMENT SUMMARY 30 YR FIXED RATE 30 YR FIXED RATE with 1 point discount The starting monthly payment for each scenario is shown below. Principal and Interest $2,334.29 $2,271.16 Taxes $458.33 $458.33 Hazard/Other Insurance $141.67 $141.67 Total Monthly Payment $2,934.29 $2,871.16 PAYMENT SAVINGS   $63.13 TOTAL PAYMENT SAVINGS ENDING YR. 7 $5,302.92 Est. Tax Savings (25.0% MFJ) $593.75 $572.92

 

There are a variety of rate and point combinations available. When you look at different loan programs, don't look just at the rate -- compare the whole package. Federal law requires lenders to publish their loans' Annual Percentage Rate, or A.P.R. The A.P.R. is a tool used to compare different terms, offered rates, and points