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Mortgage Refinancing Basics: Why Pay Points for a Lower Interest Rate

by Gabriel  Traverso
Mortgage Directory Columnist

It's important to remember when researching your mortgage refinancing options that not everyone is in the same situation. When considering whether or not to pay points for a lower mortgage rate, make sure to keep your needs in mind.

Paying Points When You Refinance Your Mortgage

When you refinance your mortgage you have many options. You also have to pay a number of fees--closing costs such as escrow, appraisal, and lender fees. The truth is, today it isn't usually a good idea, and here's why. When you refinance your mortgage, or even when you buy a new home, it's important look forward to the future and have an idea of your plans for the home. Is this just a starter home and do you plan on moving to another, larger house in a few years? Do you have a job that keeps you on the move every few years? These are important questions to ask when refinancing and thinking about paying points for a lower mortgage interest rate.

Make Sense of Mortgage Interest Rates

For some homeowners, the idea of lower mortgage interest rates is enticing, but it doesn't always make sense. If you answered yes to any of the previous questions, paying points for a lower mortgage interest rate simply doesn't make sense. Now, if you plan on staying in the home for the duration of the loan, paying points for a lower rate is probably a good idea--but do the math first.

On a $100,000 refinance, two points cost $2,000. Calculate the monthly savings from paying the points and how much your lender is lowering your interest rate. Divide the cost of the points by the monthly savings to find out how many months it takes to break even. If you plan on staying in the home for that long or longer, paying points for a lower mortgage interest rate may be a good move.

About the Author
Gabriel Traverso is a freelance writer, independent musician, and artist. He resides in Reno, NV.

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