When Buying Points On A Loan Is A Good Idea
When you shop for a mortgage loan, one thing lenders might talk to you about is points. Points are things you can purchase on your mortgage that allow you to get a lower interest rate. There are times when buying points is a great idea, but there are also times when it is not. Here are several things you should know about points if you are considering purchasing them to get a lower interest rate on your mortgage loan:
You have to pay for them upfront
When you purchase points on your loan, it will lower your interest rate; however, you must pay for the points when you close on the loan. Therefore, the first question to ask yourself is if you have the cash you need to pay this extra fee. Each point you purchase typically costs 1% of the loan amount. If you borrow $200,000, you will have to pay $2,000 for one point. If you want two points, you will have to pay $4,000. Do you have this much cash to pay when you close on your loan? If not, buying points is probably not a good idea.
You should only buy them if you plan to stay there a long time
The second important thing you should think about when applying for a loan is how long you plan on staying in the house you are buying. If you are going to move in a few years, for any reason, buying points does not make a lot of sense. Points are expensive, and most lenders encourage people to buy them only if they plan on staying put for a long time.
When you buy a point, it may reduce your interest rate by 1/4% or a little more. This will cause your payments to lower, but it takes time to recoup the money you spend on points.
To determine if buying points are good for you, compare the difference in your payments. If you will save $20 per month buying points, you can divide this into the cost of your points to see how many months you would have to live there just to pay off your points. If you must spend $2,000 on points and will save $20 a month, it would take 100 months (or about 8 years) to recoup the investment in the points.
These are some things to think about as you prepare to get a mortgage. To learn more, contact a mortgage lender that can help you with loan interest rates to talk about your situation and needs.