Buying Percentage Points on a Refinance Loan

When the time comes to consider refinancing a home loan, you may hear about using percentage points to achieve lower interest rates. If you decide to buy percentage points on a refinance loan, you'll need to inform the lender of your intention to use the percentage points to lower the interest rate on the loan and you'll need to know how to formulate the cost of each percentage point you'd like to use.

Calculating Each Point's Cost

• The formula for calculating the cost of each percentage point you wish to buy is usually that 1% of the total loan amount = 1 percentage point.
• For instance, if your total loan amount is, say, $200,000 then 1 percentage point will cost you $2,000.

How a Percentage Point Works

When you buy percentage points for a refinance loan, or any loan for that matter, the percentage points lower the interest rate applied to the loan.

• For instance, you may be offered 5.5 percent interest rate, and you want to buy percentage points to lower that rate to save yourself money over the course of the loan.
• You pay 1% of the total loan amount to earn 1 percentage point, and can bring down the cost of the loan. Usually, each point you buy reduces the interest rate by .25 percent. So your 5.5 percent rate would become 5.25

This can save you thousands of dollars if you intend to live in the house for the entire duration of the loan.

Since percentage points are used to literally buy down your current rate of interest, you should consider your investment and determine if you intend to live in the property you're currently getting a refinance loan on for a long enough time to make up the difference in cost. If you are thinking about selling the property, in most cases you wouldn't make up the up front investment of buying percentage points.

Getting Help

It can be a good idea to talk to an experienced real estate attorney before buying percentage points on a refinance loan. A lawyer can let you know if the terms of the loan are a good deal and can help you to determine what best makes sense in your situation.