Understanding Points and Buy-Downs

Points are prepaid interest. Each point is equal to 1 percent of the loan amount or $1,500 on a $150,000 loan, for example. Bankers, mortgage lenders, builders, homesellers, or anyone else can pay points so that they can offer lower interest rates and be more competitive. For instance, a car dealer may advertise a lower than market interest rate on a new car model, which means, as you probably guessed, that the dealer has made an agreement with the bank and paid points to get a lower rate. A new homebuilder does the same thing to get a lower rate on mortgages they advertise on banners and flyers at their home site. As a homeseller you can do the same by offering to pay points on a buyer’s behalf so that they’ll buy your home. The bottom line is that points cost you money. Sometimes for good, other times not. If you understand points, you can work with them for your advantage and not get taken in.