Interest vs Points

Mortgage interest rates are dropping again and many people are trying to finance their first home or refinance their existing mortgage. One thing to remember in looking at a mortgage, especially in trying to determine if it make sense to refinance, is that interest rates are only part of the total picture. While the interest rate will affect what your monthly payment will be for the duration of the loan, to determine the total cost of the loan, you must also incorporate the cost of getting the loan. This cost, sometimes called closing costs, or loan origination fees, is generally simply called points.

Points are the various costs associated with creating the loan and are usually due at the time you close on the mortgage. These fees are called points and are a percentage of the total amount loaned. A loan with 3 points of closing costs will cost about 3% of the loan amount. There is usually a trade-off between points and interest rates. A lower interest rate generally costs higher points. A loan with few or no points will come with a higher interest rate. The lender is going to get paid this money one way or the other, either up front, or spread out over the life of the loan.

When negotiating a home loan, you will need to decide which makes the most sense for you. If you need to keep the up front costs down, you can have the points rolled into the loan amount. On the other hand, if you can afford to pay the points at the time of closing, the interest rate will be lower, and so will the total cost of the mortgage.

Regardless of which way you decide to go, the points and closing costs will be itemized in the closing settlement papers. It is highly recommended that you get a document called a good faith estimate prior to getting to the closing table. This should be an exact duplicate of the closing documents based on the best information available at the time it is prepared. There will be many charges on this document from title search fees, to document delivery fees, to attorney’s fees. It will also contain the major components of your mortgage agreement such as the interest rate and the terms of the loan. It is not unusual to find errors, omissions, and miscalculations in the closing papers. This will give you time before the pressure of the closing to go over these items and verify the numbers.