What Are Mortgage Points?

by Mary Ann Romans | More from this Blogger

12 May 2009 03:24 AM

Whether you are thinking about refinancing or getting a mortgage for the first time, whether or not to opt for points can be a confusing and sticky decision. Here is a quick explanation of points and some general guidelines about whether or not it is worth paying down points to get a lower interest rate.

What are points?

When applying for your mortgage loan, you may be asked if you want to pay points. Points are a lump upfront sum of interest that you can pay at the initiation of your loan to lower your overall interest rate. The more points you pay, the lower the interest rate of your mortgage. Each point is the equivalent of 1 percent of your loan. So, if you are taking out a $200,000 loan, then one point for your mortgage would cost you $2,000.

Should you opt to pay points?

There are two main things to consider when dealing with paying points for a lower interest rate. The first is the length of time that you will be in your mortgage. You'll get the greatest benefit from points if you plan on paying your current mortgage long term, without refinancing or selling your home and moving. Over the life of your loan, the lower interest rate can be a huge savings and well worth the initial points payment.

The second thing to consider is if you can actually afford to pay the points. You want to make sure that paying down points doesn't hurt you in some other way.

For example, if don't put down at least 20 percent down payment, then you will probably be required to purchase mortgage insurance, or PMI, which can get expensive and does nothing to help pay down your premium on your mortgage. A better bet would be to place the money you might have used for points into the down payment.

Mary Ann Romans writes about everything related to saving money in the Frugal Blog, creating a home in the Home Blog, caring for little ones in the Baby Blog and now relationships in the Marriage Blog. You can read more of her articles by clicking here or subscribe to the blog using the subscription box on the right.

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Learn more about Mary Ann Romans

Mary Ann Romans is a freelance writer, wife and mother of three children. She lives in Pennsylvania with her husband, the kids and a 16-pound cat.

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