A:

Points are fees charged by a lender as part of the lending process.  Known as loan discount or origination fees they are calculated based on 1% of the mortgage amount.  A lender can charge anywhere from 0-3 points (above 3 should be discussed with your attorney and accountant) and usually are used to lower the mortgages interest rate.  The normal rule of thumb is that each point should lower your interest rate by .25% so ½ point lowers rate by .125%, 1 point lowers by .25%, 2 points lowers rate by .5%.

GOOD PRACTICE TIP:  Get a Good Faith Estimate of closing costs for a 0 point loan and discuss with your lawyer.  Ask your mortgage broker to show you the change in interest rate and closing costs should you decide to buy one or more points.  Take the cost of the points divided by the monthly cost savings to see how many months you must save before you get the initial point back.  After getting back the cost of the point you are now saving money.  With a .25% rate reduction per point it usually takes 48 months to recoup the initial point paid but after 48 months you are now ahead of the game.  Make sure you are anticipating keeping the loan for more than 48 months before considering paying points.