These options are all the combinations of interest rate and points that are offered on a particular loan. Usually you will find that paying more points lowers interest rates.
When applying for a loan, the lender typically provides you with several different scenarios for your mortgage product. These are rate/point options.
Typically, a lender does not offer you just one interest rate. Almost always, the lender will offer you several different rate options. This is made possible through adjusting the points. The interest rate generally decreases when you pay points. This is because you are actually paying interest in advance. One point is equal to one percent of the loan amount and brings the interest rate down a quarter point. For example, on a $100,000 loan, one point would equal $1,000 and bring down the interest rate from 7 percent to 6.75 percent. The more points that a buyer pays up front, the lower the interest rate will be.
So, a lender can offer you several different scenarios.
Interest Rate Points
7 % No points
6.75 % 1 point
6.5 % 2 points
6.25 % 3 points
When deciding whether or not to pay points, consider how long you plan to live in the house. If you intend to be in the house for less than five years, a general rule of thumb is to avoid paying points. Chances are, that amount of time won’t be long enough for you to recoup the initial cost.
