With the recent rise in interest rates, does it make sense to pay a percentage point (1% of the loan amount) to get a lower interest rate?

That’s a good question, and I’ll tell you how I determine the answer, based on your individual situation. But first, for those who are not familiar, I’ll explain how you can a lower interest rate by paying a point.

What Does Paying a Point Mean?

Let’s say today’s interest rate for a 30-year fixed rate is 4.25%, but you would really love 4.0%. You can opt to buy down your rate by paying one percent of your loan amount as an upfront closing cost. For example:

$200,000 loan, 0 points, 4.25% = $983/mo. principal and interest

$200,000 loan, 1 point ($2,000), 4.0% = $954/mo. principal and interest

By paying $2,000 upfront, you save$29/mo. on your payment.

How to Determine…