Points are a one time fee that is customarily needed to acquire a loan. One point is equal to 1% of the new loan amount. Points can be paid by either the buyer or the seller, and can also be split between these two parties. Either the buyer or the seller can pay discount points, if they are requested.

Points may also be used to bring down the interest rate over the life of a loan, at the borrower’s discretion. Typically, 1 point will buy your interest rate down by 0.25%. On a 30 year amortization, your break even point is 5 years. If you plan on keeping the loan for a long time, it may be beneficial for you to pay points up front.

Before deciding to pay extra points to buy down the interest rate, it is important to calculate the costs involved both with and without points, and decide which option makes the most financial sense to you. Compare the monthly payment for the two interest rates, take the difference between them and divide that number into the amount of points you will pay up front. The result is the number of months it will take you to break even. After that point, you are in the clear. It is up to you to determine if this makes it worth the initial financial obligation. The Smart Team will assist you with this decision.

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