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With interest rates rising, should I buy points upfront when getting a mortgage?

Naturally, you'll want to lock in the lowest rates on your home loan. 

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Question:

I'm shopping for a co-op and hope to buy in the next few months. With interest rates going up, does it make sense to lower my mortgage rate by buying points upfront?

Answer:

The answer depends on the size of the mortgage you're taking as well as how long you intend to live in the co-op, our experts say.

Mortgage interest rates are indeed rising. For 30-year, fixed-rate home loans, for instance, interest rates have reached 5 percent, the highest since February 2011, USA Today reports. One method that borrowers can offset this is the purchase of points, fees that buyers can pay to their mortgage lenders upon closing that help to reduce the interest rate on monthly payments. 

One point is typically equivalent to one percent of the home's total purchase price and costs about $1,000. Investopedia has a mathematical breakdown here of how exactly purchasing points can provide savings to buyers. 

Whether buying points is right for you depends on the type of mortgage you plan to take. 

"It is better to take the longest and lowest rate you can, depending on how long you plan to be in the home," says Deanna Kory, a broker with Corcoran. "For a starter apartment, common wisdom says [you will live there] five to seven years. For a long-term home, it may be better to do a 15-year mortgage, but it depends on your individual financial situation."

For buyers who plan to live in their homes for less than a decade, it's probably not worthwhile to purchase points, says Brittney Baldwin, vice president and loan officer at National Cooperative Bank (FYI, a Brick sponsor.) 

"For example, on a $100,000 loan, with a rate of 4.875 percent, the monthly estimated payment would be about $530. If you pay one point today, you would be looking at a rate of about 4.75 percent and the monthly payment of about $522," she explains. "One point would be about $1,000. It potentially would take you more than 10 years until you would start to see that savings." 

You should only buy points upfront, then, if your plans for the co-op are long-term. 


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