Do you plan on keeping your loan for a while? Then it may make sense to "buy" a lower interest rate by paying one or more "points."

Even if you're unsure of how long you plan to keep your mortgage before you move or refinance, paying points now for a lower rate may make sense. And on a purchase, points may be tax deductible. (Please discuss this with your C.P.A.) Another reason you might wish to lower your rate by paying points for your loan is to improve your monthly cash flow. It might also be a part of a longer term strategy. For example, do you have a high paying job now but you think you might change careers in the next few years? A lower payment might be worth paying higher closing costs up front. I can help you evaluate your options.

A point -- which equals one percent (1%) of the total loan amount -- is an up-front fee that lowers your monthly interest rate and total interest due over the life of the loan. So, a one point loan will have a lower interest rate than a zero point loan. Basically, when you pay points you trade off paying money later in favor of paying money now. You can pay fractions of points, too, meaning there are a lot of points packages that can make a loan's terms more favorable if that's what's right for you.

There are a variety of rate and point combinations available. When you look at different loan programs, don't look just at the rate -- compare the whole package. Federal law requires lenders to publish their loans' Annual Percentage Rate, or A.P.R. The A.P.R. is a tool used to compare different terms, offered rates, and points. Please take a look at our detailed explanation of rates and Annual Percentage Rates.