Mortgage Basics: Information for First Time Home Buyers

What are points and when should I pay them?

Points are also called origination fees or discount points. These fees are charged by the lender to decrease your mortgage interest rate. One point is equal to one percent (1 percent) of the amount of the loan. As a general rule of thumb, these fees should only be incurred if you plan to be in the home longer than 5 years. To calculate the actual break-even timeframe for your loan, divide your monthly savings from the proposed lower rate into the cost of the points. For example, if by paying $1,000 in additional points, you will save $20 per month, then your break-even point is 50 months. This means that you need to keep the loan for 50 months just to break even on the fees. Only after the first 50 months do you begin to save money on interest.