Is it a Good Idea to Buy Points when Refinancing your Mortgage Loan?
Most lenders will give you the option of buying points when you are working on a mortgage refinance loan. It is always offered for a new mortgage loan and more lenders are using it during a refinance option as well. Before you make the decision it is important that you understand what points are and how it will affect your loan. This information can help you decide if purchasing points is a good idea for you or not.
Points are fees charged upfront by the lender that is a separate charge from your interest rates. The purpose of points are to ensure the lender makes a substantial profit from the loan process. Each point equals 1% of the total principal amount of the loan. If you decide to purchase points you will be eligible for a lower interest rate on the loan.
In most cases it is a good idea to purchase points to get that lower interest rate but only if you plan to remain in the home of a long period of time. Otherwise you won’t make up the money you invested in the points. For example Mr. Smith has the option of taking out a loan for $85,000 at 7 % interest with 2 points. This means he will have to pay $1,700 for the 2 points at closing. He can also choose to take the $85,000 loan with no points but he will have to pay 8% interest on the loan. He will have to make 29 monthly payments before he has saved enough money to benefit from paying for the points. If he plans to keep the property for at least 30 months then it is a good investment to purchase the points.
You also need to realize that the money you use to purchase points can’t be use to reinvest in another option that could possibly result in more money being made. You need to take a look at your financial goals to decide how that money will best serve your needs. If you are working towards becoming free of debt then you will likely want to purchase points so that you can get a lower interest rate and pay off the loan sooner.