What are Points?

Points are the most confusing and most misunderstood part of the mortgage process. A point represents one percent of the loan amount. So on a $100,000 mortgage; one point is equal to $1,000. A point represents prepaid interest and the payment of points reduces your interest rate. For example, if a zero point mortgage has a rate of 7.5%, a one- point loan would normally have an interest rate of 7.25%. In other words, in exchange for an up front payment of interest, the bank will reduce your interest rate. This will save you money on your monthly payment. On a $100,000 mortgage, this point ($1000.00) will save you about $18 per month. Over 30 years it would save you $6,480.00. When does it make sense to pay points? You may consider paying points if you have extra money available and need a lower monthly payment to meet the needs of your budget. You will also want to make sure that you are going to own the home for a long enough period of time to recoup the funds you used to pay the point. For example, if you were only going to reside in the home for three years, you would only recoup $648.00 of the $1000.00 you paid in points. In this case it would not make sense to pay points.