In this post, we’ll go over “points” that you might have to pay for when getting a home loan.
In mortgage lending, the term “point” simply refers to 1% of the loan amount in the transaction. For example, a point on a $100K loan would be equivalent to 1% of $100K, which is $1,000. Points are important to consider when determining which interest rate you want to move forward with.
Whenever you are quoted an interest rate, you almost always are either paying for that interest rate (loan points) or you are receiving some amount of money as a rebate which can be used to cover some of your closing costs.
The lower and lower you want your interest rate to be, the greater the potential cost you will have to pay to buy down that interest rate. And vice versa, the higher interest rate is the more money you will be given back as a rebate toward your closing costs.
Now with that said, buying the interest rate, or paying “points”, makes more sense when you don’t plan on selling or refinancing your property for a while.
If you do think you’ll refinance at some point in the near future, or you think you might sell your property, it would make more sense to minimize your closing costs by taking a little higher interest rate and getting more money back to cover the closing costs.