buying points to lower interest rate

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While buying points sometimes lower interest rates, many times, the purchase costs you more than it saves. The cost of each point is equal to one percent of the loan amount. For instance, for a $100,000 loan, one discount point equals $1,000.

How buying down the interest rate with points works Points, also known as discount points and loan origination fees, are a form of prepaid interest on a mortgage. One point costs you 1% of the loan balance, which you pay at the time of your settlement on the home.

Points lower your interest rate and the more you pay upfront, the lower your interest rate, depending on the market. What’s the value in paying points? – hsh.com – Mortgage points can enable you to access a lower interest rate on your new loan whether you’re buying a home or refinancing.

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How much a discount point will reduce your rate varies from lender to lender, but is often between one-eighth to one-quarter of a percent. So buying one point might reduce a 5 percent rate to 4.875 percent or 4.75 percent, for example. You can buy multiple points, fractions of a point and even negative points (more on that later).

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Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called "buying down the rate," which can lower your monthly mortgage payments.

Paying two points at 0.25% per point would lower the interest rate to 4.5% and drop the monthly payment to $2,027. You would also need to foot the upfront cost of $8,000 to buy those points at.

In exchange for the "point," which each point equals one percent of your loan amount, you receive a slightly lower interest rate. Every lender can determine the amount they will lower the interest rate for each point.

A good credit score can lower your interest rate as much as buying points. So, before you start home shopping, get your free credit scores on Credit.com and find out where you stand. This article was last published November 23, 2016, and has since been updated by another author.