Can You Pay for a Better Rate on a Mortgage?
If there was one aspect of a mortgage that you considered important, what would it be? Many borrowers say the interest rate. They want the lowest rate possible. It makes sense. Why pay more for a mortgage than necessary? If you have room for negotiation, you should take it. Sometimes, though, the better rate doesn’t come free. You have to pay for it. Here we look at the different ways to pay for a lower rate.
The Traditional Discount Point
The most common way to buy a better rate is with a discount point. Many lenders offer 1/8th off your rate for every point you pay. One point equals 1% of your loan amount. On a $300,000, one point equals $3,000. The more points you pay, the lower your interest rate.
Lenders are able to offer the lower rate because the points are prepaid interest. The lender makes the money upfront. This way they don’t wait while you make payments. Whether you should pay the points depends on your situation. We discuss the break-even point below.
What’s Your Break-Even Point?
Before you pay those discount points, figure out your break-even point. This is the point that you pay off the points. It is based on the monthly savings you reap from the lower rate. It’s a simple calculation:
Cost of the points/Monthly savings = Break-even point
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