People often think of points and interest rates as two different things when it comes to mortgages. In fact, they can almost always be used against each other as bargaining chips.
Interest rates and points
The interest rate and points charged at the beginning of a home loan are two important parts. The interest rate is just the cost of borrowing the money, and it is based on the total amount borrowed, like 6%. When you get a home loan, the points are an upfront fee that is equal to a certain percentage of the loan. For example, one point is equal to a one percent upfront fee of the total loan amount. If you paid one point on a $300,000 loan, it would cost you $3,000.
A lot of people think that points are bad and that they should be avoided at all costs. Even though this may seem like common sense, it's not always true. From the lender's point of view, interest rates and points go together. If your cash situation is unusual, you might be able to save a lot of money on interest over the life of a loan by paying more points up front. Most of the time, the interest rate on a loan goes down when you pay more points.
If you plan to keep the house for a long time, it makes sense to pay as many points as you can on the mortgage if you have the money. This is because you can easily get your money back if you can lower the interest rate by a full percentage point or more. On a thirty-year loan, saving even 1% on the interest rate will save you tens of thousands of dollars in interest payments. In this case, it makes sense to pay about $6,000 up front to save $30,000 or $40,000 in interest payments down the road. Obviously, you need to have the money to do it.
If you only plan to live in a home for a short time, you still need to think about the same things. In this case, though, you won't be able to get back any money you spent on points because you plan to sell the house in a few years. So, you should look for a loan where you don't have to pay any points. Yes, you will have to pay a higher interest rate on the loan, but if you only plan to buy for a short time, this shouldn't matter too much.
The main point is that points and interest rates should be thought of as parts of a mortgage that go together. As a borrower, you can talk with lenders to raise or lower either one by changing the other.
