Many people are good about shopping around for interest rates these days, but many don't know what "points" are on a home loan. You need to know what they are and how they work for the best deal!
What are "Points"?
A "point" is a term short for "discount points" or how much a lender is charging upfront for the interest rate you are getting. If a lender tells you the interest rate is 4% with no "points", then nothing gets added to your closing costs, and you are not paying for the rate.
How much is a "point"? A "point" is calculated as 1% of the loan amount. For example, if you have a $400,000 loan, just 1 point would cost you $4,000 upfront!
Are points always bad? The most important thing to look at is the "break even point", or how long will it take for me to recuperate the money I spent up front on "points", because after that happens, you will start to actually save more money than if you elected to not pay points.
For example: You want to buy a house for $450,000 and you are putting 5% down on a 30 year loan. Your loan amount would be $427,500. One point would be $4,275.
A lender offers you no points at 4.875% or 1 point at 4.375%.
If you paid a point $4,275, you would save $128 a month. It would take 34 months, or almost 3 years to recoup the $4,275 that had been paid upfront. In this example the "break even point" would be 34 months, or the amount of time it took to recoup the money you spent up front.
Which should I do? Every situation is different. Questions I would ask are, "How long will I be in this home?" "Will I want to refinance before the break even point?" "Do I want to invest the money upfront or keep it liquid in my account?"
If you ever have any questions, please feel free to call me, or email me on the "contact form" on this website.