Mortgage points (also called discount points) are upfront fees you pay to the lender at closing in exchange for a lower interest rate. One point equals 1% of the loan amount.
Buying points is essentially prepaying interest. Each point you purchase typically reduces your interest rate by about 0.25%, though the exact amount varies by lender and market conditions. On a $300,000 loan, one point costs $3,000.
Whether buying points makes sense depends on how long you plan to keep the loan. If one point costs $3,000 and saves you $50 per month, your break-even point is 60 months (5 years). If you plan to stay in the home and keep the mortgage for longer than that, buying points saves you money in the long run.
Points are generally tax-deductible in the year you pay them for a purchase mortgage, and over the life of the loan for a refinance. Always calculate the break-even period before deciding to buy points, and factor in the possibility that you might refinance again or sell the home before reaching that break-even date.
The annual percentage rate is the total yearly cost of borrowing, including interest and fees, expressed as a percentage. APR gives you a more complete picture of loan cost than the interest rate alone.
Closing CostsClosing costs are the fees and expenses you pay when finalizing a mortgage, typically ranging from 2% to 5% of the loan amount. They include lender fees, appraisal costs, title insurance, and government recording charges.
RefinanceRefinancing means replacing your current mortgage with a new loan, typically to get a lower interest rate, change the loan term, or access your home equity through a cash-out refinance.
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