Question:

If I buy mortgage points, will this reduce the interest rate?

Answer:

Yes. The rule of thumb is if you buy mortgage points, your interest rate goes down with 0.125 for every 1 point bought on a regular 30-year fixed rate loan. However, for shorter term loans and adjustable rate mortgages paying 1 point may reduce the rate with up to 0.5% of the loan.

Why buy mortgage points to reduce the interest rate?

You will have to use a calculator to find out how buying mortgage points and fees affects your interest rate and whether it is worth doing this. To calculate how your interest rate is reduced and when the break-even occurs you will need to know:

  • How long you plan to stay in the house.
  • If you are buying mortgage points on a purchase or refinance transaction.
  • The loan amount.
  • The income tax bracket.
  • The interest rate.

If you are planning to stay for more than 7 years in the house, usually buying down the interest rate saves a lot of interest over the life of the loan. In the meantime, you will get tax deductions.

If you are low on cash and you don't buy mortgage points to reduce the interest rate, after the break-even occurs you will be losing money with a no points mortgage and will probably have to refinance.

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Why: Refinance to a fixed rate loan while mortgage rates are still low.
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Why: Because FHA loans are insured by the US Federal Government they have very competitive interest rates and are easier to qualify.
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Common misspellings: mortage and morgage