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The Point of Paying Points at Refinance Time

by Kristi  Shibata
Mortgage Directory Columnist

If you are in the market to refinance your home, you have the option of paying points to lower your interest rate. Lenders charge different points for refinancing, so it is best to compare mortgage rates and closing costs to determine if paying points payoff.

Refinancing: What Are "Points?"

A point is equal to 1% of the amount financed with a mortgage. Lenders can offer a lower rate to borrowers who wish to "buy the rate down" by paying points. In other words, some borrowers prefer to pay more up front and enjoy lower monthly mortgage payments over the life of the loan.

Determining whether it makes sense to pay points is easier than ever, thanks to the abundance of online mortgage calculators available. In general it makes sense to pay points when it doesn't take long to recoup the cost with lower house payments, or when you don't expect to be selling or refinancing in the near future. The further out the breakeven point is, the less likely you are to save money by paying points. Most homeowners refinance or sell their homes long before they pay off a 30 year mortgage. If the future is uncertain, a loan with a slightly higher rate but lower costs may be the most sensible option.

Closing Cost Considerations

  • Points paid when refinancing can be wrapped into the new loan if you have enough equity and don't wish to pay them out-of-pocket.
  • Points paid to refinance may be tax deductable. Check with a tax or finance professional.
  • Borrowers who can't get approved for a mortgage at a higher rate may find that buying the rate down by paying points allows them to qualify for refinancing.
MSN Money

About the Author
Kristi Shibata is a public relations and communication specialist and regular Mortgage Directory columnist. She graduated from University of California, San Diego, with a BA in Communications.

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