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Paying Points: Getting a Lower Rate Is Only Part of the Picture

by Gabriel  Traverso
Mortgage Directory Columnist

In many cases, paying a few extra points in order to get a lower rate is the right move when you refinance your home. The answer lies behind the question of how long do you plan on staying in your home.

First, What Are Points?

In simple terms, points are fees for the loan that are tied to the interest rate and paid to your lender or mortgage broker. Don't confuse points with origination or other fees, which aren't tied to your mortgage rate. The bottom line with points is this: if you pay points, you can get a lower interest rate. While paying a lower rate may sound good, is it the right thing to do?

Current Mortgage Rates Are Low

Interest rates are still reasonable as they hover just above 6%. Industry giant Freddie Mac, however, is projecting mortgage rates to go up to about 6.5% by 4th quarter next year. Couple that with the slow down of home appreciation and you are probably thinking that now is the right time to refinance--and you're right, but don't worry about those points if you plan to move in the next few years.

Break Even: Pay Points at Refinancing

When you refinance it is generally considered wise to pay those extra points for a lower rate only if you plan on staying in your home for a while--say ten years. Last year Penn State's Smeal College of Business and Freddie Mac conducted a study on paying points. They looked at nearly 4,000 mortgages and found that, on average, most of the homeowners in question paid their mortgages off over three years too early to break even on paying the points. Only 1.4% of the loans they studied were kept long enough to pay off the points and of those who didn't pay the points, only 1.5% would have been better off if they had.

Sources:
MarketWatch

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

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