Interest rate vs points.

[Jorge Ruiz]

Hello BP! I'm new so here's a question I would love for any of you to answer: What is the difference between interest rates & points? Thanks.

[George Krajacic]

It is also good point to remember that high interest rates hurts you more in the long term loans, while high points hurts you more in the short term loan. For an example, if you are flipping a property and you are going to need money only for 6 months; you rather pay higher interest than high points.

e.g. - $100,000 loan for 6 months at following rates:

a. 12% plus 3 points. Total cost-$6,000+$3,000=$9,000

b. 15% plus 1point. Total Cost-$7,500+$1,000=$8,500

In the longer term loans opposite is true.

e.g. - $100,000 loan for 5 years at following rates:

a. 10% plus 1 points. Total cost-$50,000+$1,000=$51,000

b. 8% plus 5points. Total cost-$40,000+$5,000=$45,000

Interest rate and the amount of points are used only for demonstrating purposes.

Good luck,

George