Refinancing: What Are Points?
When you are refinancing, it is not uncommon to hear lenders refer to points. But what are these? If you are going to be a savvy home loan consumer, it is important to understand common financing and refinancing terms. The term “points” is one of those terms that it is helpful to know when it comes to getting a mortgage, whether it is your first home loan or whether you are refinancing an existing mortgage.
Points: a definition
Points reflect the amount of money you pay to the lender in the form of charges. Most of the time, these are paid at the time of closing. Sometimes points can be rolled into the loan, allow you to refinance without having to pay anything upfront. If you are getting a cash-out refinance, some lenders will allow you to deduct points from the cash you will get back when the loan refinance process is complete. It is important to note that points are not the same thing as other closing fees. Most lenders have closing fees that are separate from points.
How much is a point?
A point is equal to 1% of the amount of the loan. So, if you refinance for $100,000, one point is equal to $1,000. You can compare various lenders’ interest rates and points before you decide on a home loan. This is usually a good idea, as you can save more money. Generally speaking, the more points you agree to, the lower your interest rate will be. Most lenders reduce the interest rate by about 0.125% per point you agree to pay up front. This means that if you get a loan with one point, you might pay a 6.375% interest rate on it instead of the 6.5% interest rate that you would pay if you took a loan with no points.
When to “buy down” using points
You can offer to “buy down” the interest rate on your refinance loan by paying points. This works best when you will be in your home for at least 7 years. This is because it takes roughly 5 to 7 years (and sometimes longer) to for the reduced interest rate received for points to “pay for itself.” If you are planning on moving within a short time of refinancing, it is probably not worth it to use points to reduce your interest rate. You won’t recoup the money. But if you are planning on staying for longer, you can save a great deal of money over the life of your loan due to the lower interest rate you have.
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