How to Refinance: Points vs. Rates

By Debbie Wilson Columnist

If you plan to refinance your current mortgage, comparing loans may not be as easy as you think. In order to truly evaluate loans, you need to understand loan costs, meaning rates, points, and fees. A loan that looks like a deal at first glance may not be--and understanding the costs is crucial to making a smart choice in mortgages.


The Value of a Point

A point is a fee that is paid to a lender or mortgage broker, equal to 1% of the loan amount. This fee may be used to lower your rate, or "buy it down." Points may also be used to eliminate a prepayment penalty, or "buy it out," or to secure other favorable terms. The decision to pay points depends on whether the benefit of paying the points exceeds the cost.

Comparing the APR

In order to effectively compare loans, it is important to review similar information in each loan. The easiest way to do this is by comparing Annual Percentage Rates, or APRs. The APR takes many of the loan costs into account, including points, insurance, and the interest rate. Review each lender's Truth in Lending disclosure, which indicates the APR. You should also review their Good Faith Estimates (GFEs), which list the estimated costs and fees associated with the refinance transaction. To get a valid comparison you must compare apples to apples--an APR on a 5/1 hybrid should only be compared with other 5/1 hybrids, with the same loan amount, the same loan to value, and so on. When comparing two identical loans, the one with the lower APR is the better deal.

Are Points Worth the Cost?

Deciding upon whether points are worth the cost has more to do with your specific short-term and long-term goals than the actual cost of the points themselves. Paying points might cost you additional money upfront, but it also has the potential to save you quite a bit of money over the course of a 30-year refinanced mortgage. Conversely, if you don't plan to stay in your home for a long period of time, paying points upfront might not be advantageous since you won't be paying on the refinanced mortgage long enough to realize future benefits.

The choice is yours. Just remember that by comparing APRs, which represent the total cost of borrowing (rates, fees, points), only then can you make an informed decision on your next refinanced mortgage and truly get the best loan available.

About the Author
Debbie Wilson owns and operates a lakeside resort. Her previous experience includes profitability consulting for a national healthcare company. Debbie holds a B.A. in Business Management with a minor in Physical Education.

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