Many people don?t really know what ?points? are when it comes to discussing their mortgage. Points are fees paid to the lender at the closing of the mortgage. Each point=1% of the mortgage. If your mortgage is for $100,000, one point would cost you $1,000.

Lenders take these upfront payments to reduce the long term cost of the mortgage. The ratios change, depending on the market and the bank, but here is an example for a mortgage at 6.25%: if you pay one and one half points, you will lower the mortgage rate to 5.875%, if you pay 2 ? points, you would reduce the rate to 5.375%.

The important thing to consider when you are deciding upon paying points is how long you plan on living in your home, and whether or not you can afford the points upfront. Don?t consider the idea of borrowing extra to have the money to pay for points; this doesn?t make any economic sense. First time home buyers frequently will not find it any benefit to pay points, since many do not stay in their first home for long.

Points should be viewed as an investment in the mortgage. Paying 1.5 points to lower your mortgage from 6% to 5.5% is an investment, but is it a good one? It is a bit like prepaying part of your mortgage interest bill.

It can be calculated whether or not it is worthwhile for you to pay points, depending on how long you will be in your home; use one of the many calculators on the internet or ask a mortgage consultant to do it for you, free of cost.

The $100,000 loan we were talking about would require $1,500 in points to lower the rate to 5%. It is necessary to find the breakeven point on how valuable this $1,500 investment will be. The monthly mortgage for a 15 year 5.5% loan is 599.55 a month. The monthly mortgage for a 30 year. 5.5% loan is $567.79 a month.

The points paid will save you $31.76 a month, but you had to give the bank $1,500 in order to get this savings. If you divide your investment of $1,500 by your savings of $31.76, you will see that it will take 47.23 months for you to recoup the investment. If you don?t plan on staying in your home for this length of time, you will not have any advantage from paying points.

After that point, however, the upfront investment of $1,500 is covered, and you will now save a total of $31.76 each month. Let us now suppose (this doesn?t happen very frequently today) that you really stayed in your home for the thirty years; you would save that $31.76 over the course of 30 years, a big savings of $9,933.58!

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