People who are financing home loans should understand mortgage interest rates and how they are calculated. If you are planning to stay in your home for a long time, it may be to your benefit to pay as many points up front as possible. The more points you can afford to pay, the lower your monthly mortgage payment will be and in the long run will save you considerable amount of money. However, if you are planning to stay in your home for less than 10 years, this may not be an option worth consideration.



Points, often called "discount points," are prepaid interest rates that lower the amount of interest on your monthly mortgage payment. For each point that you can pay at closing, it will lower your interest rate by .25 percent. A point is .01 percent of the loan, therefore, you can calculate the cost of the points easily. For example, if you are financing $100,000 home loan x .01 percent for the points equals $1,000 for each point. If you can pay $3,000 on the points this will lower your monthly interest rate by .75 percent. Most lenders recommend that you should not pay points unless you can afford to pay 20% of the the mortgage at closing. This will reduce the amount of insurance that the lender will require you to carry on the mortgage.



The formula that you should use to determine if paying the points at the time of closing is a valid option for you is very simple. Divide the amount you will pay for the points by the amount you will save on the monthly mortgage payment. This will give you the number of months it will take to recoup the expense of paying the points. As a general rule, it will take longer than 10 years; therefore, if you are not planning to stay in the home for 10 years or more, paying the points probably will not be an option for you to consider. Paying points at the time of closing may lower your property taxes. Before closing you should consult the local tax office to learn how this will affect the amount of taxes that you are required to pay every year.



There are some unscrupulous lenders that are collecting the points payment during closing but not actually lowering interest rates. They are able to get away with this practice because most people do not want to take the time to read the contract thoroughly or skip reading the fine print. Before making a major investment, such as a home loan, it is a good idea to research everything carefully. The lender should be able to give a variety of options for paying points. If the lender refuses that should be a "red flag" to you that something is wrong with this mortgage plan. Keep looking, because there are plenty of mortgage lenders that operate within the law in your state.