What are "Points"?

Each "point" makes up 1% of the loan amount. They are often referred to as such when discussing closing costs and fees to be paid to Mortgage Brokers. Sometimes the Lender pays a certain amount of "points" to the Broker depending on the program they select. Other times, however, the customer can pay "points" to a Broker as a way to "buy down" the rate. If the customer is willing to pay "points," and the Mortgage Broker is being honest with them, they can almost always receive a significantly better rate than they would have otherwise.

While "points" on a loan do increase the settlement charges on your mortgage, it's also important to note that these fees are fully tax deductible to you over the life of the loan.

A major factor in determining whether or not to pay points is how long you intend to hold on to the new mortgage. In general, one point (or 1% of the loan amount) will buy your rate down by .25%. You need to calculate the monthly savings and divide that into the cost of the point. This will show you how many months until you are "even".

For example, if the loan size was $200,000, one point would cost you $2,000. If you reduced your rate by .25% you would save about $42 a month on an Interest Only loan. It would take you just under 48 months or 4 years to break even. If you think you will hold on to your new mortgage at least 4 years it will be to your advantage to pay the point - if you think you may hold the mortgage less than 4 years than you would not want to pay the point.