 |
| Image via FreeDigitalPhotos.net |
A point is generally one percent of the loan amount. A
borrower may pay points to buy down the interest rate, and the more points paid,
the lower the rate the borrower may get. Paying points will increase the
borrower’s closing costs, however, because they will be getting a lower rate,
their monthly payment will be less.
At some point during the loan term, the
amount saved monthly will equal the amount paid up front in points. Paying
points may make sense if the borrower plans to keep the property and not refinance
for at least the amount of time it takes to recoup the money spent in upfront
points (through the monthly savings due to the lower interest rate purchased).
Conversely, a borrower could take a higher interest rate
than market and have the lender credit them money towards their closing costs.
This may make sense if a borrower plans to keep a property or loan for a
shorter period of time, or if the borrower wants little or no out of pocket
expenses above their down payment.
