Interest (in rate)
A fee charged for borrowing money. Also refers to money that a financial institution may pay individuals for keeping their money in an account there (such as an interest-bearing savings account).
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Points, also known as “discount points,” are fees paid directly to the Glossary Term: lender at closing in exchange for a reduced Glossary Term: interest rate. This is also called “buying down the rate,” which can, in turn, lower your monthly mortgage payments.A point is equal to 1% of your mortgage amount (or $1,000 for every $100,000). You’re essentially paying some Glossary Term: interest up front in exchange for a lower interest rate over the life of your loan.
The general rule is that the longer you plan to own the home, the more you might benefit from buying points, because you would realize more interest savings over the life of the loan. When you consider whether points will be right for you, it helps to run the numbers. Here’s an example:
An important thing to consider is how long it will take for the upfront cost of the points to equal the savings you get on your monthly payment. This is called the Glossary Term: break-even period.
In the example above, you’ll see that if you paid $2,000 for one point to lower your interest rate 0.25%, you’d have a monthly payment savings of $30.55. To find the break-even point, you’d divide $2,000 (the upfront cost) by $30.55 (the monthly savings), to see how long you’d have to live in your home for it to be worth the upfront cost. In this example, it would take 65.4 months to recoup the initial cost.
Buying points to lower your rate may make sense if:
Deciding how to best use your home savings is a personal choice. Now that you’re armed with a better knowledge of how points work, ask your lender to provide you with more information to help you decide whether they could work to your advantage.