How do you "buy" a better rate? Great question - let me tell you.
A point -- which equals 1% of the total loan amount -- is an up-front fee that lowers your annual interest rate and total interest due over the life of your loan. So, a one point loan will have a lower interest rate than a no point loan. Basically, when you pay points you trade off paying money later in favor of paying money now. You can pay fractions of points also, meaning you can paying 1.5% to get a lower rate than if you paid 1%.
Several major lenders are offering "No Closing Cost" and "No Fee" loans. This is a great concept for someone who is not planning to stay in their home for very long. Otherwise, it could be a big rip-off! No one, I repeat, NO ONE, does a loan for free. You either pay the fees upfront, or you pay them in the rate. A mortgage planner will look at your long-term goals and help you determine which is the best way for you.
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. In these times of low interest rates, doesn't it make sense to buy your rate down as low as possible? Chances are, you won't ever be refinancing to get a lower rate again! Not only that, but points paid on a loan are usually tax deductible, depending on your income bracket (check with your CPA or tax preparer for details).
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 APR. The APR is a tool used to compare different terms, offered rates, and points. I can't count the number of times clients have thought they were getting better deals, until I told them to look at the APR, which tells the real story!
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