Question: Justin – Because of the low interest rates, we’ve been looking into the possibility of refinancing our mortgage. Our lender sent us a bunch of options with different closing costs and we don’t know which one to pick. Any thoughts?
Answer: Happy to help. Mortgage points are an option for the borrower to increase or decrease the interest rate of the new loan. If you want to decrease the interest rate, you pay additional fees at closing to buy down the rate. If you want to decrease your closing costs, you can often increase the interest rate.
Determining whether this makes sense comes down to how long you think you will keep this mortgage. I chose my words carefully there. It is not a matter of how long you will stay in the house, it is how long you will keep the same mortgage. When you have numbers from the lender you can calculate the breakeven point but let us say it was six years. If you think you will stay in the house for more than six years AND you do not plan to refinance again or pay off the mortgage during that time frame, buying points can make sense. If you know you will not be in the house for more than the breakeven time frame, or you think it is likely you will refinance again or pay off the mortgage entirely, it does not make sense to pay extra fees to buy points.
Also, it is worth mentioning that I strongly recommend shopping around when you are evaluating a refinance. I talk with a lot of people who only contact one lender about refinance options. You should reach out to at least three different institutions. I just had a client who was about to proceed with a refinance, but I told them to contact an additional bank I had seen good offers come from lately. That one extra contact ended up saving them about $30,000 over the course of the loan.
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