Most people when they hear the word “points,” they associate it with a higher cost on their loans.
However, the reality is one point equals 1% of the loan amount. This means that if you are borrowing $100,000, paying one point would increase the closing cost by $1,000.
Yet most people don’t realize that points can work in reverse, as well. In exchange for you agreeing to a higher interest rate, you can actually receive a lender credit which can go to lowering some of the closing costs. This is called premium pricing.
Whether or not you pay points or get lender credit depends on your particular situation. We can analyze that as part of a cost break-even analysis to determine which one is going to be appropriate for you given your holding period and your goals.
Keep in mind, though, that one point equals roughly a .25% difference in interest rate. Therefore, if you pay a point, you can expect the interest rate to be about a quarter of a percent lower. If you increase the rate by a point, or if you get a lender credit for a point, you can expect it would be about a quarter of a percent higher.
I don’t want you to think that if you pay a point, your interest rates will be a full percent lower. This is not how it works. It is just a rule of thumb.
For more information on points, lender credits, and closing costs, please visit:
If you have any questions about this, please feel free to reach out to me. I look forward to speaking with you soon.