Should You Purchase Points When You Refinance Your Mortgage?

When you are considering a mortgage refinance, you may be given the option to buy points. This was probably presented to you when you applied for the original mortgage and it is also an option when refinancing. But what exactly are points and when is it a good idea to purchase points if you are refinancing. This article will answer these questions so you can make an informed decision about point purchasing.

Points are an upfront fee charged by the lender. This fee is separate from interest and is designed to increase the profit to the lender. One point is 1% of the total principal amount of the loan. Purchasing points will lower your interest rate.

So, when is it a good idea to pay for more points to get a lower interest rate? Well, it depends on if you will you maintain the property long enough to retrieve the money you put into buying the points? Here is an example. A lender gives John Smith the option of a $85,000 loan at 7 percent with 2 points which means $1700 to pay for the two points will be due at closing. Or the option of the $85,000 at 8 percent with no points. It will take more than 29 months to recoup the $1700 paid in points. So, if Mr. Smith plans to hold the property for at least 30 months or more, then it makes sense to purchase the points to gain the lower interest rate.

The other thing to consider about point purchasing is that the money you use to buy the points cannot be used in another investment that may have yielded you a higher return. It is important to know what your goals are when refinancing so that you can make good decisions.

If your goal is to be debt-free then you should do whatever you can to achieve that goal and that may mean purchasing points. When you know what your ultimate goals are, then you can make decisions that reflect those goals and a mortgage refinance may fit perfectly into your financial plan.