This is a common question that comes up among borrowers.  In simplest terms a point is 1% of the loan principal.  For example, if you were borrowing $350,000 at 1 point, you’d be paying $3,500 up front for that loan.  There is usually a direct correlation between the number of points a lender is charging and the interest rates they quote for the same type of mortgage, for example a fixed rate mortgage.  Essentially the more points a borrower pays, the lower the interest rate will be on the loan and vice versa.   

Paying points in order to lower your mortgage interest rate is often a difficult consideration and one that your mortgage company can help you weigh as far as options.  Sometimes it may make sense for a borrower to pay the points because the savings in interest payments overtime will outweigh the initial financial stretch. 

When deciding if it’s worth paying points, you must first consider how long you plan on owning your house.  The longer a person remains in their home paying their mortgage, the more feasible it would be for them to pay more points up front to lower their interest rate.  On the other hand, if someone is thinking of selling or refinancing within a few years it’s probably better for them to get a loan with fewer points. 

Any good loan officer or loan broker will be able to steer you in the right direction by showing you all the options available and the tradeoffs that exist with higher fees or points for a lower interest rate.

Last updated on November 11, 2010 by Admin