How many points must one pay to reduce an interest rate 1 percentage point?

It’s generally agreed that one point paid at closing is equal to 1/8th of a percent in interest over the life of a 30-year mortgage. To obtain a one percent interest rate reduction some would thus argue — incorrectly — that a borrower must pay 8 points up front.

Why is this argument incorrect? Because loans rarely last 30 years. They are typically paid off in eight to 12 years because homes are sold and loans are re-financed or paid-off.

This means that to reduce an interest rate 1 percent you are likely to pay substantially less than 8 points up front. How much less depends on your bargaining skills — at the very least speak with an array of lenders, ask them to give you a loan quote at “par,” and let them compete for your business.

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Posted in: Mortgages

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