Paying points allows a borrower to “buy down” the interest rate on a mortgage by paying an upfront fee. Since interest rates are at or near record lows, many borrowers see no reason to pay points when buying or refinancing a home. Some are even opting for what’s known as “negative points” — which is also called a lender rebate or points in reverse — agreeing to a slightly higher rate to help pay closing costs.
A point equals 1 percent of the loan amount, so paying one point on a $300,000 refinancing costs an extra $3,000 at closing, not including other mortgage fees, taxes and escrow amounts. Paying a point usually reduces the interest rate by 0.25 points over its term. For instance, instead of 4 percent, the rate becomes 3.75 percent. According to a Freddie Mac survey, the average number of points paid in 2011 was 0.7 percent, less than half the levels people paid the 1990’s. In 2007 it hit a low of 0.4 percent, while in 1995 it averaged 1.8 percent.
The primary advantages of paying points are a lower rate and monthly payment. To decide if paying points is worthwhile, borrowers should consider two key decisions: How long they plan to live in the home, and how much they can afford in closing costs. Many mortgage professionals suggest following this rule: If the borrower plans to live in the home for at least five years, then paying points will afford the homeowners substantial savings.
You can read the full New York Times article here.