| Should You Pay Extra Points To Get Lower Mortgage Rates? |
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Paying points at the time of your mortgage closing is an effective way of lowering the interest rate you pay on your loan. The question is “should you do it?” and the answer to that is “it depends.” First let’s define exactly what a point is. A point is an up front fee you pay to lower your interest rate. Each point equals 1% of the loan. Thus, if your mortgage is $200,000 each point would equal a payment at closing of $2,000. Now, here is how it works: Let’s say that your $200,000 mortgage that your planning on getting has a 6.125% interest rate (which is the current level as I write this) for a 30 year fixed rate. The principal and interest payment is $1,215.22 per month. Now let’s say you want to pay 1 point (1% of $200,000 equals $2,000) to reduce the interest rate to 5.875%. Then the payment would reduce to $1,183.08 which is $32.14 less than the 6.125% rate. That $32.14 per month savings would take approximately 4 years to equal the $2,000 of the initial point paid. Then, during the next 300 monthly payments of the 30 year loan you would also save $32.14 a month. That would mean that at the end of the 30 year mortgage you would save a total of $9,642. (after deducting the initial $2,000) because you paid the 1 point at closing. Sounds great doesn’t it? Well it is if you keep the mortgage for 30 years! This is where the rub comes in. The national average for keeping a mortgage is ironically around 4 years. That means that a lot of people are selling or refinancing their property a lot sooner than 4 years. For these folks, to pay the extra point would be a losing proposition. If you are going to keep the mortgage for a long time, paying the extra point is a good idea. It will save you money by reducing your monthly payment. You might even want to pay as much as 2 points to get that much more of a savings. However, if you do not plan to own the house a long time, or if you think you may refinance you should not pay the extra point. Another thing to remember is that nothing is as constant as change. A lot of people plan to keep a mortgage a long time and then something changes. It happens all the time. So, we are now back to the original question. Should you pay points to get lower mortgage rates? It depends, and now you know what it depends on. It’s your mortgage and your choice. Don’t let some slick “know it all” talk you into it. You are armed with the facts and it is your decision to make. 04/2007 Kazwell Newsletter 
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Should You Pay Extra Points To Get Lower Mortgage Rates? Paying points at the time of your mortgage closing is an effective way of lowering the interest rate you pay on your loan. The question is... © 2010 - Kazwell.com Powered by QuoteThis © 2008 Related Articles
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