Should I Pay Points to Lower Interest Rate?
What Are Points?
When it comes to mortgages, points are fees you pay upfront in order to reduce your interest rate. A single point is typically equal to 1% of the total loan amount. For example, if you take out a loan for $200,000, one point would be equal to $2,000. Paying points to get a lower interest rate can be a good idea if you plan on living in the home for a long time and can afford the upfront cost.
How Much Will It Lower My Interest Rate?
The amount your interest rate will be lowered depends on the current market rate and the number of points you pay. Typically, one point will lower your interest rate by 0.25% to 0.375%, although this can vary. For example, if the current market rate for a 30-year fixed loan is 4.00%, you may be able to lower it to 3.75% with one point.
Should I Pay Points?
Whether you should pay points or not will depend on your individual situation. To decide if it's a good idea, you'll need to look at the total cost of the loan and how long you plan on living in the house. Paying points upfront can save you a lot of money in the long run, but it also means you'll have to come up with a large amount of cash up front. If you plan on living in the home for a long time and you can afford the upfront cost, then it may be worth it.
Are There Other Options?
If you don't have the money to pay points, there are other options. One is to increase the loan amount and borrow the points, which essentially means that you would add the cost of the points to your loan. Another option is to pay a higher interest rate, which may save you some money in the short term but it will cost you more in the long run.
Conclusion
Paying points to lower your interest rate can be a great way to save money in the long run, but it requires you to pay a large amount of money upfront. It's important to consider your individual situation and decide if it's the right move for you. If you plan on living in the home for a long time and you can afford the upfront cost, then it may be worth it.