When it's time to close on a mortgage, you have a number of choices. One of these options is to pay points to lower the interest rate. Here is the information you need to figure out if you should pay points on your mortgage.
A mortgage point is the same as 1% of the total cost of the loan. So, if you want to borrow $150,000 for a mortgage, each point will cost you $1,500. There are 8 points for every 1 percent of interest. In other words, the interest rate will have to go down by 8 points before it goes down by one full percent. The interest rate will go down by 0.125 percent for every point paid. Most of the time, if you bring it down even one point, you can save money.
Paying points at closing can lower your interest rate and save you money, but it's not a good idea for everyone. Usually, you would need to live in your house for a few years. If you don't plan to stay long, it won't help much.
The following example shows why this is the case. This will show you how to figure out how long it will take for your investment to pay for itself. If you borrow $100,000 to buy a house and the interest rate is 7.5%, you would pay about $700 per month. If you pay $1,000 to buy one point, your interest rate will go down to 7.375 percent, and your payment will be about $691. Your payments are now different by about $9. By dividing the $1,000 you paid for the apartment by the $9 you saved ($1,000 / $9), you get 111, which is the number of months you need to live there to break even.
In the example given above, you would have to live in that house for 9 years and 3 months before you would have paid off your mortgage. Because of this, you have to live in your home for a while before you can start saving money.
If you only plan to stay for a short time, you might want to find other ways to save money. This can be done by making a bigger down payment, making sure your total debt is low and your credit score is high, or just paying more each month. Go online and find some good mortgage calculators to help you figure out which option would be best.
Also, when you go to get a mortgage, get several quotes from different lenders and figure out which one gives you the best deal. All you have to do is compare their interest rates, fees, total costs, and what options you have carefully. You'll soon see that picking the best offer will save you hundreds or even thousands of dollars over the life of the loan.
