What Are Refinance Points?
Points are the mortgage industry's term for a fee charged to a borrower to purchase a lower interest rate or to "buy down" an interest rate. Refinance points are simply the points charged to a borrower to buy down their interest rate while refinancing the loan.
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Significance
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Points can allow a borrower to lower the overall monthly payment by lowering the monthly interest rate charged. However, the borrower will be paying an upfront fee to do so.
Function
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The interest rate is lowered by the points from the beginning of the mortgage and continues throughout the life of the loan.
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Misconceptions
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An origination fee of 1 percent is assessed on most mortgages and is not the same as a point. Points are paid upfront to the lender to get a better interest rate. One "point" is a fee that equals 1 percent of the loan amount.
Features
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Points come in 1/8th percentages. To buy down a rate from 5.5 percent, your first option would be 5.375 percent and then down from there. The lower your buy down the rate, the more expensive the points.
Considerations
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To calculate if buying points is in the borrower's best interest, he should calculate the number of months it takes to break even on the closing costs with the monthly savings. Two years should be the maximum break-even point.
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References
- Photo Credit Image by Flickr.com, courtesy of woodley wonderworks
