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Mortgage Refinancing: What are Discount Points

When you compare mortgage offers you will see that many require points. What are points? If you are going to find the best deal for your new mortgage it is important to understand the terminology associated with refinancing your mortgage. Points are an important part of qualifying for a mortgage; paying points when you don’t have to is a waste of money.

What are Discount Points?

Discount points, or points, are simply an upfront fee you pay the mortgage lender at closing. Points are pre-paid interest on the loan. Some mortgage lenders will finance your points, meaning you do not have to come up with the cash at closing. The points you are required to pay are in addition to your closing costs. You should get something in exchange for paying points, typically a lower interest rate.

How Much is One Point?

One point is one percent of the loan amount. If your mortgage is for $200,000, one point will cost you $2,000. The more points you agree to pay at closing the lower your mortgage interest rate should be. Mortgage lenders typically lower your interest rate by .25% for each point you pay. Paying points doesn’t make sense for every homeowner. The savings you realize by paying the points have to allow you to recoup the expenses to make paying points worthwhile.

Should You Pay Points?

Paying points can be a negotiating point for your new mortgage. If you plan on staying in your home for seven years or longer you will have time to recoup the expense of paying points. If you plan on moving sooner you will most likely lose money by paying this fee. You can learn more about your mortgage options, including common mistakes to avoid by registering for our free mortgage guidebook.

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