Consumers sometimes pay too much in points for lower refinance rates, and wind up spending more money than if they simply paid no points and accepted a higher rate. At other times, points paid save thousands of dollars over the life of a mortgage. Your circumstances will determine if itâ ™s beneficial to pay points when you do a mortgage refinance.
A â śpointâ ť is equal to one percent of the amount of the mortgage, and is charged by the lender as prepaid interest. As part of the esoteric terminology of the mortgage refinance language, theyâ ™re a constant source of confusion and indecision. Understanding points can be complicated, but it doesnâ ™t have to be. Before deciding whether paying them to get lower refinance rates is the smartest thing to do, consider a few â śpointersâ ť passed along by mortgage refinance professionals.
People tend to buy too many points.
A recent study at Penn Stateâ ™s Smeal College of Business revealed that borrowers tend to buy more points than they need when refinancing. By overestimating the length of time the loan will be held before selling or refinancing the house, borrowers typically fail to break even on points paid for lower refinance rates.
Points are tax deductible.
The money paid for points provides a tax break either in the year the loan is originated, or during the life of the loan. That additional perk encourages homeowners who may want to â śpay downâ ť their refinance rate up front to get more attractive terms.
Math never lies.
Donâ ™t become intimidated by pointsâ ”let the arithmetic speak for itself. Compare and contrast the pros and cons and the bottom line, based on how much youâ ™ll payâ ”in totalâ ”over the lifetime of the loan. That will depend, of course, on how long you keep the loan. If you can accurately determine how soon you plan to move or sell, it will help considerably.
Find a mortgage lender you trust, and have them provide you with several side-by-side refinance mortgage scenarios, based on no points versus points paid. By adding up the closing costs (including points and after the payment of taxes), and comparing monthly payments, you can see exactly how many months or years it will take to break even. And that will give you a concrete, easy answer that can help you get right to the point.
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