How Many Points Must
You Pay to the Lender to Obtain the Loan?
In refinancing, lenders usually offer 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.
Shopping for points as well as interest rates
may save you money. As a rule of thumb, each point adds about one-eighth to one-quarter of
one percent to the interest rate the lender is offering.
Generally, the lower the interest rate on the
loan, the more points the lending institution will charge. Some lenders offer refinancing
with no points, but generally charge higher interest rates.
To decide what combination of rate and points
is best for you, balance the amount you can pay up front with the amount you can pay
monthly. The less time that you keep the loan, the more expensive points become. If you
plan to stay in your house for a long time, then it may be worthwhile to pay additional
points to obtain a lower interest rate.
Some lenders may offer to finance the points
so that you do not have to pay them up front. This means that the points will be added to
your loan balance, and you will pay a finance charge on them. Although this may enable you
to get the financing, it also will increase the amount of your monthly payments.