Points are actually the fees that home buyer pay directly to the lender at closing. This payment reduces interest rate in exchange. This points based payment is also known as “buying down the rate,” which can, in turn, lower your monthly payments. A point is equal to 1% of your home loan amount (or $1,000 for every $100,000), and it’s essentially like paying some interest up front, in exchange for a lower interest rate over the life of your loan.
In order to know whether points are the right choice for you, you must ask following questions to yourself:
- Do you have the cash available to pay points up front in addition to your down payment, closing costs, and reserves?
- How long do you plan to own the home?
Buying points makes sense if you’re getting a fixed-rate mortgage, you’ll be in the home after you’ve reached the break-even period, and or paying points doesn’t come at the expense of lowering your down payment.
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