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What are points and should I pay points to lower my rate?

A point is an upfront fee, where each point is equal to one percentage of the mortgage amount. Paying points is a way to reduce or “buy down” a mortgage interest rate. If you borrowed $100,000, one point would cost $1,000. And that will typically buy down your interest rate a quarter of a percent. For example, if your interest rate is 4.00% and you pay one point, you get a rate of 3.75%.

Deciding whether or not to pay points to lower your rate depends on two things: Do you have the cash available to pay for the points upfront and how long do you plan to stay in the home. If you have the cash available and if you continue ownership of the house beyond the breakeven point, you can recoup your upfront payment for points and begin enjoying lower payments for the remainder of the mortgage. If you sell the house before your breakeven point, you may lose money.

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