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TERMINOLOGY
Paying points is a trade-off between paying money now and paying money later. If you choose to pay points, you will pay an upfront fee that reduces your monthly interest rate and total interest due over the life of a loan. A point always equals 1 percent of the total loan amount. For example, a loan with points will have lower interest rates than a loan with no points.
As a general rule, you can expect to reduce your interest rates by 1/4 to 1/8 of a percent for each point you pay up front. Additionally, because points are considered to be interest payments, they are usually tax-deductible. Check with your lender to see if this is true in your case.
Deciding whether to pay points mostly depends on how long you expect to keep the loan. If your plan on keeping the loan for at least four years, it is advisable to pay points up front so that you can recoup these costs through the lower monthly payments you will receive. If you expect to move within four years or if you want to refinance due to declining market rates, a no point loan is probably a better decision for you.
Most lenders will allow you to choose from a variety of rate and point combinations for the same loan product. When comparing rates from different lenders, make sure you take a look at the point/rate combinations that are being offered by each program. To make an accurate comparison you can use the published Annual Percentage Rate (APR) to compare different terms, offered rates, and points among different lenders and programs.
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