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…
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