In the mortgage world, a point equals 1 percent of the total mortgage loan amount. This amount is paid upfront and serves to reduce the monthly interest rate as well as the total interest due over the term of the mortgage loan. Translation: A one point mortgage will always carry a lower interest rate than a mortgage loan with zero points. Pre-paying points on your mortgage is trading off paying a little now vs. paying a lot later during the term of your mortgage loan.
As a homeowner you need to determine if paying points up front would benefit you. Determining this depends on how long you will be staying in your home. If you plan on keeping the mortgage for at least five years you would benefit from paying points on the loan up front. This will allow you to recoup the costs by having lower monthly payments due to the lower mortgage interest rate. If you plan on moving anytime during the next four years or considering refinancing during this time you should consider a zero points mortgage loan, especially since interest rates are low.
Many mortgage lenders will allow you to choose from a variety of point and interest rate combinations for the same type of loan. When you do this you will be able to compare mortgage loans from a variety of lenders. The more homework you do up front the more money you’ll save over the long run.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
