How do you "buy" a better rate?

Do you plan on keeping your loan for a while? Then it may make sense to "buy" a lower interest rate by paying one or more "points."

Even if you're unsure of how long you plan to keep your mortgage before you move or refinance, paying points now for a lower rate may make sense. For example, do you have a high-paying job now but you think you might change careers in the next few years? We can help you sort it out. It's part of our finding the right loan for your means and goals.

A point -- which equals one percent (1%) of the total loan amount -- is an up-front fee that lowers your monthly interest rate and total interest due over the life of the loan. So, a one point loan will have a lower interest rate than a no point loan.   Each bank has it's own rule on how much a point buys down a rate.  Usually it is about a 1/4% for one point on the average.  So if you have a $200,000 mortgage and want to buy down a 6% rate then it is going to cost you $2000 to get a 5 3/4% rate.  What you have to do then is figure out how much you are saving each month divide it into the amount you paid to get the rate lowered.  The end number is how many months it is going to take you to break even. 

Basically, when you pay points you trade off paying money later in favor of paying money now. You can pay fractions of points, meaning there are a lot of points packages that can make a loan's terms more favorable if that's what's right for you.  Points are tax deductible but you should consult your CPA or accountant to get the correct information.

There are a variety of rate and point combinations available. When you look at different loan programs, don't look just at the rate -- compare the whole package. Federal law requires lenders to publish their loans' Annual Percentage Rate, or A.P.R.. The A.P.R. is a tool used to compare different terms, offered rates, and points.

The bottom line is that it usually does not make sense to buy points unless you are going to stay in the loan for a long time.  The average time a mortgage is held is about  4 years due to people refinancing, or selling the home.  It usually take 6 to 8 years to break even when buying points.