How do Interest Rates and Points Work?

Think of interest rates and points on opposite ends of a scale.  The more that you pay upfront, the higher the points, the higher the closing costs, the lower the interest rate that you would have over the life of the loan.  Also vice versa, the fewer the points and fewer closing costs that you pay upfront, the higher the interest rate you would pay over the life of the loan.

The way to determine which option makes sense for you is to look at what is your monthly savings by purchasing that lower rate and what is it costing you upfront to get that lower rate?  You divide your savings by what you are paying upfront, and look at how many years it is going to take you to recapture that upfront cost.  Many folks will choose to pay the higher points or higher costs to get the lower rate when the recapture time frame is less than 5 years.  When we start to see the time frame hit 5 years or longer, than most folks will take that savings right up front and take a little bit higher rate over the life of the loan.  You have to look at your individual situation and consider how long you believe you will be making payments on that mortgage.

A few other things do impact the interest rates such as the size of your loan, if you are purchasing a home or refinancing, what your credit score is, the type of property you are purchasing, if you will include the taxes and insurance with your monthly payment, and more.  This means it’s important when getting rate quotes from different lenders that you let that lender know exactly what your situation is so they can provide an accurate rate quote to you.

If you would like straight forward, comprehensive feedback on the home financing options available, please call Julie Ozanich at 858-369-7510.

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With a mission to provide a higher standard of mortgage lending services, Julie began her career in mortgage banking in 1990. To date, Julie has successfully closed over $1 billion in mortgage loans and helped over two thousand customers achieve their mortgage goals. Program availability may differ slightly in different states. Terms may vary. Subject to change without notice. Bank of Manhattan is not affiliated with nor endorses The Carmel Valley Life. NMLS# 479603.