Points are simply the option to reduce your interest rate for your loan by paying this fee called "points." This is like pre-paying a portion of you interest, so that your interest payments ongoing are reduced. Each point is equal to 1% of the loan amount. For example, if you pay 1 point on a $100,000 loan, the cost of the point is $1,000. If you wanted to pay two points the cost would be $2,000. Each point that you pay will lower your interest rate by approximately 1/4%. On a $100,000 loan each point will lower your payment about $17 a month. The down side is that this money is due up-front and once you pay points, the money is gone because it is the cost of getting this loan with the more favorable terms. In other words. it's a fee and you can never get any portion of this fee refunded. So, if you were not going to have this loan long enough for your savings to offset your initial costs of the points, you should not consider paying points. Unless you are being transferred in a corporate relocation where your company is paying points, it usually does not make sense to pay points unless you plan on owning the property 5-7 years.

Secondly, you should take into consideration your expectations of interest rates in the next five years. If you expect interest rates to remain stable or increase, it makes more sense to pay points than if you expect interest rates to fall. Our logic is that if you expect interest rates to be stable or increase the opportunity to refinance and get a lower interest rate probably will not exist. If you expect interest rates to fall, the opposite is true. For example, if interest rates fall 1/2%, you can get a better rate than if you paid 1 point simply by paying the cost of refinancing your loan. Depending on where you live, the costs of refinancing can be less than 1% or the equivalent of one point (refinancing costs are reliant on title expenses, which vary by state and county). In the example above, you should invest your money or use it to increase your down payment and pass on paying points. When interest rates fall, refinance. All you can do is consider what you think interest rates will do in the future as there are no guarantees about what interest rates will actually do.

Lastly, you should take into account the return you expect on your investments. If you attain a rate of return on your investments greater than 6%, you may be better off investing your money versus paying points.