Q: My husband and I are refinancing our house. I know what interest rates are, but what are points and how does it affect my loan? MsFF:
In a nutshell, points represent the interest that you prepay at the time you close the loan. Each point is 1% of the loan amount. So if you have a $100,000 loan with 2 points, you will prepay $2,000. Many lenders will lower the points in return for raising the interest rate by a fraction (around 1/8% or 1/4%) or if you would like a lower interest rate you can pay more points. Although, it will cost you more money upfront, it's usually better to go with a lower interest rate if you plan to keep your house for longer than five years. You will pay more points, but you will reduce your long term costs.
When you are looking for the best loan with the lowest interest rate and comparing different rates, be sure to ask the loan broker to quote you both the interest rate and the points. When I comparison shop
rates, I ask the loan broker to quote me their best interest rate at "0" points that way I can compare the rates "apples to apples"....and that's a "point" well taken
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