Refinancing Your Mortgage

Rate versus Point Comparison

Here is an example of the rate versus point comparison calculation. It assumes that the typical fees (credit report, appraisal, flood, etc.) for the loan are the same for both loans. The loan with the lower effective rate wins.


Lower Rate and
Higher Points

Higher Rate and
Lower Points

a) Interest Rate



b) Number of years you plan to hold the loan

5 years

5 years

c) Multiply (a) by (b)



d) Points



e) Add lines (c) and (d)



f) Divide line (e) by (b) to estimate the Effective Annual Interest Rate



The effective annual interest rate represents the true annual cost of the loan over the period of time you intend to keep the loan. The effect of paying more points will diminish the longer you intend to hold the loan. Although this calculation will help you determine your best choice, it does not take into consideration the time value of money. If the time value of money is factored in, the effective annual interest rate would rise slightly as you pay more points.

IMPORTANT NOTE: Points paid on a mortgage for the purchase of one's principal residence are tax-deductible in the year they are paid. Points paid on a mortgage for the purchase of other real estate are deductible over the term of the loan.

SUGGESTION: Assuming equivalent APR's on two mortgages, one with points and one without, the rule of thumb is that the no point mortgage will be cheaper unless you plan on holding your mortgage loan at least nine or ten years.

SUGGESTION: Mortgage lenders are in a position to help explain the various features and benefits of the lending programs they offer. Don't be afraid to ask for help in understanding the many options.

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