Choosing Among Rate/Point Combinations

Lender fees consist of points, which are expressed as a percent of the loan amount, and other fees which are specified in dollars. To avoid confusion, we add them together as “total fees”.

Points are traded off against the interest rate. Pay more points and you receive a lower rate. This makes it an investment on which the return is the lower interest payment and faster balance reduction that results from the lower rate.

The longer you have the mortgage, the higher the return. If you expect to have the mortgage 4 years or longer, and have the money to pay points, it is usually a good investment. You can determine exactly how good using Mortgage Points Calculator, Rate of Return on FRMs (11c) and Mortgage Points Calculator, Rate of Return on ARMs (11d).

A rebate paid by a lender on high-rate loans can be used to defray settlement costs. If you expect to pay off the mortgage within 3 years, it is a reasonable option. If you take a rebate because you are cash-short, it becomes extremely expensive if you pay the higher rate for more than 3 years.

Readings:
   When Are Points on a Mortgage a Good Investment?
   The Break-Even Period For Paying Points on a Mortgage

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