Points

In the US, paying points is an option that allows you some flexibility between paying money upfront and paying more down the line through higher interest rates. A point is defined as one percent of the total loan amount. When rates are quoted in advertisements, points are usually included as a part of the quote.

However, points aren’t a necessity, but an option. The number of points can vary greatly on the same loan, with rates decreasing as the number of points paid increase, and rates going up as the number of points decline. Many borrowers have limited options when it comes to points. Those who are short on cash are forced to pay fewer points and take a higher interest rate.

On the other hand, those who have lower incomes may need to pay more points in order to afford the house they are looking to purchase. When looking for a principal mortgage, these buyers want the lowest rate possible so their monthly payments won’t be seen as too large to be supported by their income.

Other borrowers can use more discretion when deciding how many points to pay on their principal mortgage. One of the factors to consider is how long you plan to stay in your new home. If you plan to be their making payments on your mortgage long-term, you may want to pay more points. You’ll recover the extra money you paid upfront through reduced interest payments over the years. However, if you won’t be around long enough to take advantage of these savings, you’ll want to forego paying extra points and take the higher rate.

Another consideration is what you would use the extra money for if you choose not to pay the points. You may have other priorities that would put this money to better use, even if you plan to be in the house for a long time. Future savings are not always worth increased opportunity today.