Using Points To Cut Your Interest Rate

Understanding Points in Mortgage Financing

A common belief in real estate is that you should avoid paying points when securing a mortgage. However, this assumption may not always hold true.

The Role of Points in Mortgage Rates

Points are upfront fees paid to a lender to reduce the interest rate on a mortgage. These fees are typically expressed as a percentage of the loan amount. For borrowers with strong financial profiles—such as high credit scores, substantial down payments, and stable incomes—fewer points may be required. Conversely, in certain situations, it may be advantageous to consider paying points.

How Points Affect Interest Rates

The relationship between points and interest rates is significant. Generally, paying more points can lead to a lower interest rate on your mortgage. This principle is widely applicable, though it may vary for borrowers with poor credit histories. By leveraging this relationship, you can potentially secure a lower interest rate, which can result in substantial long-term savings.

If you plan to reside in the property for an extended period, reducing your interest rate can lead to significant financial benefits. Paying points upfront may be a strategic decision if you have sufficient cash reserves. To maximize the advantage, inquire with your lender about the exact reduction in interest rate per point paid, and request this information in writing.

Calculating the Benefits

Use a mortgage calculator to assess the long-term savings of various lower interest rates. Compare the reduced monthly payments and the total cost of paying additional points to determine whether the investment is worthwhile.

Contrary to some marketing claims, points are not necessarily detrimental. When used judiciously, they can help you save a substantial amount over the life of your mortgage.