What Are Points in Refinancing?
A point is a fee paid by the borrower to reduce or "buy down" the interest rate on a mortgage. Points are usually charged when refinancing the mortgage.
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Significance
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Points allow a borrower to receive a lower interest rate over the life of the loan. The fee associated with the point is based on the interest rate pricing on the day the borrower locks, or secures, the rate for financing.
Function
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A lower interest rate over the life of the loan allows a borrower to pay less overall interest, lowering the total cost of the mortgage.
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Time Frame
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The borrower can pay points to lower the interest rate only during a period prior to the closing on the refinanced mortgage. After the loan is closed, the interest rate is set.
Considerations
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A borrower should consider how much the points will cost him. Divide the monthly savings by the amount of the fee to determine the break-even point on the expense.
Misconceptions
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A point is not the same as the origination fee, which is the fee (usually 1% of the loan value) charged to the borrower by the lender for its services. A point is only associated with the interest rate itself and is separate from the origination fee.
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References
- Photo Credit Image by Flickr.com, courtesy of Alan Cleaver
