- Understand what it means to buy points before you hear the suggestion from your lender or broker. A discount point is 1 percent of the proposed loan. So if you plan to borrow $200,000, a point is $2,000. You can elect to pay a point at closing in order to receive a lower interest rate. Note that in some cases a broker will quote you a rate that already includes a point --- if you choose not to pay a point, the rate is generally higher in this case.
- Refinancing a loan is the process of transferring your home debt to a new account. The purpose is to get a debt account with a better set of terms than what you already have. Refinancing a mortgage is usually less complicated than the process of getting an initial loan to finance a purchase. You must meet the lender's credit and income requirements, agree to an appraisal to determine the most recent value for the home and go to closing to refinance the loan.
- The question of whether it is worthwhile to purchase points at refinancing depends on one key factor. The benefit of paying a lower rate only kicks in if you plan to keep the same loan for at least a few years. You can determine if there is a benefit to buying points for your proposed loan using the Money-Zine Mortgage Points Calculator. So if you plan to keep the same home loan for an extended period of time and have the cash to pay for the points up front, it may be worthwhile to buy points at refinancing.
- Also, you must consider the immediate expense of buying the points. You have to come up with thousands more at loan closing in addition to your standard closing costs (including the appraisal fee and origination fees). If you do not have the money to pay up front, in rare cases a lender may agree to build the additional cost into your loan with other closing costs -- particularly if you have a lot of equity or value in the home -- but that increases the loan balance and costs more in interest expense over time.
Buying Points
Refinancing Information
Is It Worthwhile?
Additional Considerations
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