paying points to lower interest rate

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Just as lenders can lower an interest rate by charging the borrower a point, the lender may also provide a credit toward a borrower’s closing costs by increasing the interest rate. Determining whether or not to increase a rate to offset closing costs is decided in the very same fashion as paying points: cost vs. benefit.

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Paying points for a lower interest rate is a trade off between paying money now versus paying money later. A point – equaling 1% of the total loan amount – is an upfront fee that reduces your monthly interest rate and total interest due over the life of a loan.

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If you’re buying a home, you may be better off negotiating seller-paid points instead of a lower purchase price. So for a home listed at $200,000, instead of offering $196,000 (98 percent of the purchase price), it might be better to pay $200,000 and get seller-paid discount points costing 2 percent of the loan amount.

In short, if you pay mortgage discount points at closing, aside from any commissions and any other lender fees, you can bring your interest rate down to a lower level. And then save money each month via a lower mortgage payment.

Buying mortgage points when you close can reduce the interest rate, which in turn reduces the monthly payment. But each point will cost 1 percent of your mortgage balance. This mortgage points.

For example, if you inherited a large sum of money and want to buy a home, but you only qualify for a certain amount, you can pay discount points to lower your interest rate and help you qualify for the purchase of the house. Or if you’re retired and want to downsize your home and monthly payment, paying points can be useful.

Discount points are a type of pre-paid interest. So by paying part of your interest up front, you can get a lower rate. And what you save in interest over the long haul can be a lot more than what you paid for the points up front. The question is, will you save enough to make it worth the initial cost?