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Points May Not Help With Today's Low Mortgage Rates

By sbup Staff
Mortgage rates reached an all-time low this week, averaging 4.91% for a 30-year fixed-rate mortgage (FRM), according to the Rate Index. That represents a 0.3 percentage point drop from the previous week.

Meanwhile, the government-backed mortgage giant Freddie Mac (Stock quote: FRE) reported an average of 4.85% for 30-year FRMs with an average payment of 0.7 points. Points are a way for consumers to lower the interest rate on their loan. For a fee of one percent of the total loan amount, one point will lower an interest rate by around 0.125%.  For more information on points and other closing costs, click here.

With rates already at historic lows, however, paying extra for points may not be worth it in the long run. To see why, check out the Mortgage Points calculator from

The calculator can compare the two scenarios -- 4.85% interest with 0.7 points versus 4.91% interest and no points -- for a $200,000 30-year FRM. The calculator assumes that you have $1,400 available to either pay for the points or to use as a down payment. Entering the two scenarios into the calculator shows that even after 30 years, the benefits of lowering the interest rate by 0.06 percentage points -- the drop you’d get by purchasing 0.7 points -- over the life of the loan won’t cover the $1,400 cost of those points. What’s more, using that $1,400 to increase your down payment will result in a smaller loan amount and lower monthly payments.

The rate adjustment for points varies from lender to lender, so be sure to consider your own situation carefully before making a decision. For instance, if your lender offers to lower your interest rate by more than the 0.06 percentage points in the above example, buying the points might prove worthwhile.

Rate offers vary widely from lender to lender, so it's important to shop around for the best rates. Start your search at by entering your ZIP code to see rate offers from local institutions. For instance, residents of New York can apply for 30-year FRMs from HSBC (Stock quote: HBC) with an interest rate of 4.75% and no points, from Wachovia Bank (Stock quote: WB) with a rate of 4.55% and 0.25 points, or from JPMorgan Chase (Stock quote: JPM) with a rate of 4.875% and no points.

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