What are points?

Points are calculated in the costs of the loan and they are based on 1% of the loan amount. For example: 2 points on a $100,000 loan is $2,000. Points are paid to the loan originator, as commission, or to the lender to obtain a better rate or term depending on the lender's guidelines.

What about Zero-Point/Zero-Fee Loans?

Thousands of homeowners have refinanced with a zero-point/zero-fee loan. This works by using rebate pricing, or a yield-spread. Basically, there is no such thing, because you pay a higher rate so that the lender puts "cash up front". That "cash up front" is used to pay the closing costs of your loan. You pay a higher monthly payment, so the Zero-Point/Zero-Fee loan costs comes from your future payments. Simply put, the lender is paying your costs up front, and collecting them back from you later.

When you hear a mortgage company promoting Zero-Points/Zero-Fee Loans, it is important to remember that you are still paying the costs of your loan, pay now, or pay later, it is your decision.

Are Zero-Point/Zero-Fee Loans a bad idea?

You have no immediate costs, so if the rates drop even slightly, you could refinance again sooner rather than later. Zero-Points/Zero-Fee Loans can be a good idea if you want the flexibility to refinance soon  if you choose an adjustable rate loan. Remember that you will be paying a higher rate than you would if you had paid points and closing costs, and you may incur a pre-payment penalty if you refinance, or sell too soon. If you are planning to stay in your home for a long period of time, it may not be your best option, on the other hand, of you are planning to sell with 2-3 years, it may be a good idea.

The best idea is to contact your mortgage professional to find out if a Zero-Points/Zero-Fee Loan fits into your financial plan.

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