Getting a mortgage can be a time consuming stressful task. The paperwork never ends, and the wait for approval can seem like a lifetime.
Then there are the expenses. There are appraisal fees, legal fees, bank fees and fees for things you never knew existed. At times it seems that everyone has a hand in your pocket!
So, logically, you want to have as low a mortgage payment as possible. After all, you will be paying this every month for quite some time to come. You know how much money you need to borrow. That is a set number. You know how long your mortgage will run. That is also set. The only variable left is the interest rate you will pay.
You have, no doubt, shopped around for the best mortgage deal you can get given your income, credit history and the price of your new home. Then your lender presents you will a pricing menu with something called points. The more points you pay, the lower your interest rate will be.
One point is equal to one percent of your loan. If you are borrowing $100,000, one point is $1,000. Two points would be $2,000 and so on. This is an upfront payment by you to the lender, although some lenders will let you roll your points into the loan amount.
The best way to think of points is as pre-paid interest. You are paying the lender money today in today’s dollars as opposed to paying them slowly over the life of the mortgage with tomorrow’s dollars. As everyone knows, due to inflation a dollar today is worth more than a dollar a year from now.
Are points a good deal? It really depends. One point does not reduce the interest rate by the same amount everywhere. Each lender is different. But, sometimes, a rate reduction can make the monthly mortgage payment fit better into one’s budget and income. Everyone’s situation is different. Time to bring out the calculator.