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Paying Points For A Lower Rate
If you are considering paying points for a
lower rate on your mortgage, there are several things
that you should take into consideration. First and
foremost, how long do you plan on living in the home and
if you plan on living in it for awhile, do you
anticipate needing to refinance anytime within the first
few years? If you will not be in the home for more than
a few years and or you anticipate the need to refinance
within a couple of years, paying points for a lower rate
probably will not make a lot of sense. Considering that
the average homeowner sells or refinances every 4.5
years, this should really make you think about whether
or not you may or may not be in the same home loan
within the next few years. Therefore, paying points for
a lower rate will benefit some people, but not usually
when you do not plan on keeping that loan for too long.
PAYING POINTS FOR A LOWER RATE
In refinancing, a mortgage company usually offers a range of interest rates at different amounts of points. A point equals one percent of the loan amount. For example, three points on a $100,000 mortgage loan would add $3,000 to the refinancing charges. The Points which you pay to reduce the interest rate are called discount points. The most common buydown is a 2/1. These charges are also sometimes referred to as "buy-down points." Points are tax deductable over the life of the loan. And, if the home is sold, the remaining deduction can be takin in the last year of the loan.
Buying down your interest rate by paying points to the lender requires some analysis and forethought on your mortgage needs. If you plan on keeping your mortgage for 5 years or more and your interest rate is your most important considersation, it may make sense to buy down your rate, however, if you are unsure how long you will keep your new mortgage, it probably makes sense not to buy down the rate. Ask your mortgage broker to run a cost comparison of closing cost and payments with and without paying points and see which best fits your needs.
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Information listed above is to be used for educational purposes only and is not guaranteed
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