When you refinance a mortgage, a mortgage company usually offers different interest rates each with a different amount of points. A point is equal to one percent of the loan amount. For example, four points on a $100,000 mortgage loan would add $4,000 to the cost of refinancing the mortgage. Analyzing different interest rates and the points that go with them may save you some money. As a rule, each point adds about one-eighth to one-quarter of one percent to whatever interest rate the mortgage company is offering. Typically, the lower the interest rate on the mortgage, the more points the mortgage lender will charge. Some offer mortgage refinancing with no points, but they generally charge higher interest rates.
To decide which combination of interest rate and points is best for you, take the amount you can pay up front with the amount you can pay each month. The less time that you keep the mortgage, the more expensive your points will become. If you plan to stay in your home for a long period of time, then it may be worth your while to pay additional points to obtain a lowest interest rate. Some companies may offer to finance your points so that you do not have to pay for them up front. This means the points will be added to your mortgage balance, and you will pay an additional finance charge on them. Although this may enable you to get the financing you need, it also will increase the amount of your monthly mortgage payments.
The bottom line here is to have a mortgage lender that you feel comfortable with that will help you work through these decisions. You need to find someone that will take the time to make sure you have all the knowledge you need to make an informed decision on your mortgage loan.
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