Points

Points are an important part of the process of obtaining a fixed rate mortgage. Points are basically fees paid at the closing of your loan, and are expressed as a percentage of the loan. One point is equal to one percent of the total loan cost (for a $100,000 loan, three points would equal $3000). Points are considered part of the cost of the loan to the borrower, and are part of the investment return from the perspective of the lender.

No one is required to pay points, but many people choose to do so. Advertisements usually quote rates that include points, but most lenders are willing to make a no-point loan if requested. The amount of points required varies along with the interest rate offered. Obviously, the more points you pay the less your interest rate will be, and less points correspond with a higher rate. Often lenders will begin with a few rate-point combinations, but have many more available combinations to share at the appropriate time. Lenders usually refrain from quoting all their available combinations in advertising materials for fear of making the already-complex process of obtaining a mortgage even more confusing.

How many points you want to pay is a decision entirely up to you. Some consumers don’t have as much practical choice. If they are short on cash, they will have to pay fewer points and pay a higher rate. If their income is low, they may have to pay more points up front to insure their payments will be low enough that they will be approved for the loan.

If you fall into neither of these categories, you have a decision to make. The fist guideline in this decision is the time you plan to keep the loan. If you plan to move in the relatively near future, you will never see the long-term savings achieved by paying more points in exchange for a lower rate. The second guideline is your individual opportunity cost. Determine if there are other uses for the money you would pay for points and decide if they take precedence over long-term savings to be gained from paying extra points.

In the end, the points system is a good way to offer consumers choices about whether they would like to pay more upfront or deal with a slightly higher interest rate, leading to paying more in the long run.