Deciding when to pay mortgage points

One decision that many mortgage borrowers must make is when to pay off the points on their home loan. A mortgage company will provide their potential borrowers with a variety of different mortgage interest rates with different point amounts. One point is equal to one percent of the total home loan. Discount points are prepaid mortgage interest amounts that are paid to lower the mortgage interest rate. Paying one point typically reduces the mortgage interest rate by .25 percent. The lowest mortgage rates often come with more points that are charged by the mortgage company. This is why it is important to look at both mortgage interest rates and points when deciding which the best mortgage rate is.

The less time that a home owner keeps the mortgage loan, the more expensive the points become. Those who are planning to stay in their home for a long time may want to pay additional points to obtain a lower interest rate. A mortgage company may also finance the points for borrowers that do not want to pay the points at closing, so the points are added to the home loan amount. Home buyers must decide whether it is best to pay the points up front, or pay them with the home loan. When the points are added to the home loan, finance charges will also apply.

This makes the closing costs more agreeable, but will also increase monthly payments. Borrowers that have less money to pay up front should pay the points later, but should expect to pay more per month. In order to make sure that a mortgage company is a reputable one, borrowers should ask their home loan representative for mortgage rate quotes with different point and interest rate combinations. For each .25 percent change in the mortgage interest rate, the borrower should only be required to pay one additional point. To determine if paying the extra points is a good decision, borrowers can do some simple calculating.

By dividing the amount that will be paid by the amount saved on monthly payments, mortgage borrowers can determine how long it will take to make up for the extra money paid in points. People with longer payment terms will usually find that paying the points at closing makes more sense. The decision ultimately comes down to the borrower of the home loan. Those who have less money to pay up front may consider adding the points to the home loan and paying them off monthly, but this will increase monthly payments. In order to keep monthly payments down and get the best mortgage rates in the long run, home loan borrowers should try to do everything in their power to pay the points up front, at closing time.

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