Mortgage Rates and Points . . . Madison Wisconsin

The interest rate determines the monthly interest payments over the lifetime of the loan. A "point" or "discount point" is equivalent to 1% of the loan amount and usually reduces or "discounts" the loan rate by an eighth of a percentage point.

For example: You want to get a loan for $100,000 to buy a home. Each "point" would cost you 1% of $100,000 or $1,000 but would reduce your loan's interest rate by .125%. The lender might offer you an 8.0% loan with zero points, a 7.875% loan with one point, or a 7.75% loan with 2 points.

Points, like the down payment, are paid at closing. In some cases, lenders will allow borrowers to finance the points over the term of the loan. Lenders sometimes use points to make their interest rates appear lower. Be aware that lower interest rate offered by a lender may translate into higher points requirements.

Should You Pay More or Less "Up-Front"?

The size of the down payment, money paid at closing, can affect your mortgage in a number of ways.

Higher up-front payments result in:

• lower monthly payments
• lower private mortgage insurance (PMI) costs (if applicable)
• lower interest payments

In fact, making a down payment of 20% or more can save the home buyer money by avoiding the monthly mortgage insurance payments. On the other hand, lower up-front costs mean that your cash requirements at closing are much less, although monthly payments may be somewhat higher. These lower up-front costs may be a significant benefit for first-time home buyers and people who simply don't have a lot of cash on hand.

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