Points

Simply defined, a point is one percent of the cost of the house you are buying. Therefore, the amount of a point varies from mortgage to mortgage. A point in a transaction concerning a $100,000 house would be $1,000, while a point in a transaction concerning a $200,000 would be $2,000.

Many times, certain costs related to closing are determined in terms of points. For instance, a contract might specify an origination fee of one point. Also, many lenders offer a system whereby you can pay points upfront in order to lower your interest rate. In this rubric, one point usually lowers the interest rate .25 percent.

To take an example, let’s say the Smiths are getting a mortgage at a fixed eight percent interest rate with the option to buy up to three points. The Smiths have saved for this house for years, and have enough money to pay for the points upfront. By exercising their option to purchase three points, the Smiths were able to lower their interest rate to 7.25 percent.

Even if you have the cash to pay for points, it may not always be in your best interest. For instance, if you plan to move within a few years, having a lower interest rate is unlikely to offset the upfront cost of paying for points.

When you submit your application, it is wise to request a rate lock. Rate locks lock-in your interest rate and reserves the number of points you want to pay. That way, if the market takes a turn for the worse as you wait for your application to be returned, your mortgage will not be negatively affected.