Understanding Interest Rates |
The best interest rate is the lowest interest rate - True or False?
Life would be easier if the answer was "True." Lenders would only have
one interest rate to talk about for each loan program. But it's not
that simple. Here's the situation: lenders lend money just like other
businesses sell other products. They have to cover the cost of the
product, including:
- Cost of the money lent
- Employment costs
- Overhead
- Profit
Not very mysterious, is it? Lenders have a couple of different ways to earn money:
- Fees
- Points
Points can be described in two categories, depending on your local market -- origination and discount. Origination points are meant to cover the cost of originating the loan. Discount points are used to reduce the interest rate on the loan.
The more discount points you pay, the lower your interest rate will be. That's why lenders have so many pricing options to choose from. As a general guideline:
Pay points when:
- The seller is willing to pay them
- Your company will pay them (relocation packages)
- You plan on keeping the property more than about seven years
- You need the lowest interest rate for qualifying purposes
Avoid paying points when:
- You're short on cash reserves or cash to close
- You don't intend on keeping the property for more than about seven years
- You think you might refinance within the next seven years
- You need all the cash you have to pay off bills to qualify
While this is an important decision to make, you can always change your mind later on, when your loan is in process. Just let your lender know in plenty of time so it can make the appropriate changes to your application.
| Use our interactive calculator to see if paying points makes sense for you |
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