Miscellaneous Mortgage Refinancing Tips: Should You Pay Points to get a Lower Interest Rate?

Home Mortgage Refinancing: Understanding Points

First of all, remember that there is a difference between lenders’ origination fees, also called points, and discount points, which you use to buy down your interest rate. This article discusses the latter of the two. Besides being a little confusing to the inexperienced mortgage shopper, they can end up a point of contention between borrower and lender. While it often makes sense for a purchaser to pay points, those who refinance sometimes get little or nothing out of it. However, a lender who wants to make more money from your loan may encourage you to pay discount points.

Points and Your Home Mortgage Refinancing Loan

A lender who puts points on a list of costs to refinance your loan should also tell you how it will change your loan. Some experts say that for every point you pay at closing, you should get a certain percentage off your interest rate. Keeping in mind that your refinance points are tax deductible over the life of the loan, not immediately, they can reduce the effectiveness of your refinancing, especially considering that you are already restarting your loan and the high interest-to-principal ratio of your early payments.

Visit MYFICO.COM -- Calculating Points

The website www.myfico.com has an amazing calculator that will help you decide if points are fair for you to pay. For this calculator to work to its fullest, you will need all your upfront costs and many other details, but it’s worth it. After you get your results, take them to the lender and discuss points—however, make sure the lender reviews with you your total interest payment over the life of the loan. Add the cost of your points to that amount as well as the amount you will lose in tax deductions (you must take your deductions over the life of the loan, not up front), and compare to the total interest payment over the life of your current loan.

Mortgage Home Refinancing: How Long Will You be in the Home?

You will also have to consider how long you will be in the home. If you won’t be there long, paying points won’t help you come out ahead. In fact, it could be an expensive waste of money. If you are planning on living there for some time and the numbers add up in your favor, then by all means consider paying points. Always remember to check with your tax professional and/or attorney to make sure you are figuring the impact on your total outcome correctly.