In financing, a mortgage company usually offers a range of interest
rates at different amounts of points. A point equals one percent of the
loan amount. For example, three points on a $100,000 mortgage loan would
add $3,000 to the financing charges.
Analyzing various interest rates and associated points may save you
money. As a rule of thumb, each point adds about
one-eighth to one-quarter of one percent to the interest rate the
mortgage company is offering.
Generally, the lower the interest rate on the loan, the more points
the lending institution will charge. Some companies offer financing with
no points, but generally charge higher interest rates.
To decide what combination of rate and points is best for you,
balance the amount you can pay up front with the amount you can pay
monthly. The less time that you keep the loan, the more expensive points
become. If you plan to stay in your house for a long time, then it may
be worthwhile to pay additional points to obtain a lower interest rate.
Some companies may offer to finance the points so that you do not
have to pay them up front. This means that the points will be added to
your loan balance, and you will pay a finance charge on them. Although
this may enable you to get the financing, it also will increase the
amount of your monthly payments.