Is it Better to Get a Low Interest Rate With No Points?
Borrowers looking to purchase a new mortgage want the lowest interest rate possible, without having to pay an extra fee, or "points" to receive it. Having the highest possible credit score will yield the borrower the best rates, without having to pay extra.
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Significance
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The interest rate charged to a mortgage determines the monthly payment and the overall interest expense of the loan. The lower the rate, the lower the payment and the interest paid.
Function
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Points, or a percentage of the loan amount, are charged to a borrower to "buy down" or lower an interest rate. The total amount paid in points should at least be offset by the rate reduction to make paying points financially viable.
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Types
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A mortgage interest rate can be fixed or variable. Variable rates or ARM (adjustable rate mortgages) are usually lower than fixed rates in the beginning term of the loan but may or may not rise in the future.
Considerations
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Borrowers with the highest credit scores, above 700, often receive better and lower interest rates than borrowers with lower credit scores.
Misconceptions
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Points are not the same as the origination fee, which is the fee paid to the lender for doing the mortgage.
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References
- Photo Credit Image by Flickr.com, courtesy of Casey Serin
