QUESTION: How do you decide whether or not to pay points and how many?
ANSWER: Whether or not to pay points and how many depends on a number of factors, including how much money you have to put down at closing and how long you plan to stay in the home.
Points are prepaid interest (usually $1,000 per $100,000 of your loan) and paid at closing. Paying points can reduce the interest rate on your mortgage, which is an advantage if you plan to stay in the home for a while.
But if you need the lowest possible closing costs, then you will want to pay the fewest points available on a loan. In exchange, you will have to accept a higher interest rate.
For example, a lender might offer you a 30-year fixed rate mortgage of $165,000 at 6 percent interest rate with no points. Your monthly mortgage principal and interest payment would be $989.
If you buy two points for $3,300, you might be able to drop the interest rate to 5.5 percent, saving you $52 a month on your mortgage principal and interest payment. At $52 a month, it would take you 64 months to earn back the $3,300 you put down at closing.
Obviously, if you plan to stay in the home longer than 64 months, it is to your advantage to pay points and buy down the interest rate, unless you do not have an extra $3,300 to put down at closing.
As you can see, lots of factors go into the decision to pay or not to pay points.
QUESTION: We’re having second thoughts about going forward with a home equity loan we applied for. We’re pretty far along in the process. The bank told us the loan was approved and the documents ready to be signed electronically.
What would be the consequences if we told the bank we don’t want to go forward with this loan?
ANSWER: You can always cancel and not close on a home equity loan. You have the right to back out before you sign the documents, and you can even back out after you sign the documents within three days of the closing. This is known as the “right of rescission.”
Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: firstname.lastname@example.org.