When discussing mortgages, it is important to understand what points are. Points are essentially an upfront cost you pay a lender in exchange for getting the loan in question. The better your financial profile – credit score, wages, down payment amount – the fewer points you have to pay, if any. That being said, you may actually want to demand points in certain situations.
Points and interest rates have a unique relationship in mortgages. Generally, the more points you pay, the lower your interest rate. This is not always the case in bad credit situations, but it is a generally accepted fact for most bowers. You can use this relationship to your advantage.
Regardless of how many points you pay on a loan, the cost will never remotely approach the amount of interest you pay over the life of the loan. If you intend to live in the property in question for a long time, you should make an almighty effort to cut your interest rate as low as possible. This is where you will save the most money. This is also where points come in.
If you are cash rich when you buy the property, you can buy down your interest rate by agreeing to pay the lender a significant number of points. The key is to find out from the lender how much they will reduce the interest rate per point paid. You want this in writing! Once you have it, use a mortgage calculator to see how much money the various lower interest rates will save you over time. Also, see how much you monthly payment is reduced. Once you have the numbers, compare them to the total cost of paying additional points and make your decision.
Contrary to popular opinion and marketing ads, points do not represent the evil side of the mortgage industry. Use them wisely and you can save hundreds of thousands of dollars over the life of a loan.
