Refinancing To Pay Costs Or Not To Pay Costs?

Refinancing To Pay Costs Or Not To Pay Costs?

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When you ask the lender, What is your interest rate today? he will probably give you one interest rate. Most lenders do this because they are tired of explaining they actually have many rates to give for every product.

The difference between one interest rate and another is who pays the discount points, you or the lender. A discount point equals one percent of the loan amount. Youve heard of buying down the rate. You actually pay points to buy down the rate. Well, it can work the other way as well. The lender can pay points to you by driving up the rate.

So, for every 1/8 to point in rate the lender will pay you or you will pay the lender one percent of the loan in cash. You are considering refinancing your home. Should you pay points or have the lender pay you point to cover your closing costs?

The answer lies in how long you plan on keeping your home. Lets say you have a $200,000 mortgage. If you have the lender pay one point toward your closing cost that equals $2,000. If that point raises your interest rate point you have to take into consideration the monthly cost of that increase in rate over time as it relates to the money you get today to pay your costs.

In the above example the rate hike of point costs the borrower about $36 per month. That means if the borrower plans on being in the home less than 57 months taking the higher interest rate is probably a pretty good idea. Fifty-seven months multiplied by the savings of thirty-six dollars per month comes out to just about $2,000.

On the flip side if you know you will be in the home for the long haul, it is probably best to pay your costs and get the lower rate. It will pay dividends in the long run.

About the Author:
Determine if pay points is a good idea for your Houston mortgage refinance. This is another great Dallas mortgage loan calculator to let the math determine the choice for you.



Article Originally Published On: http://www.articlesnatch.com


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