If you are shopping for a mortgage you may wonder if paying points is necessary, or even a good idea. Here is what you need to know about paying points upfront on your mortgage loan.

Points, often called discount points, are paid to the lender when you close on the mortgage. This represents a fee, or prepaid interest, that you will pay in exchange for some aspect of the mortgage. You might pay discount points in exchange for a lower interest rate, better terms, or even just to qualify for the mortgage loan.

What are Points?

One point is equal to one percent of the loan balance. If your lender requires you to pay one point at closing and you are borrowing $150,000, you will need to pay the lender $1500 to close on the mortgage. Many lenders charge between one and three points on their loans.

Do You Have to Pay Points?

The answer to this question depends on your individual circumstance. If you have excellent credit you may not be required to pay points upfront. If you have poor credit, you can count on lenders requiring points as a condition of being approved for the mortgage loan.

Do You Want to Pay Points?

Whether or not paying points is in your best interest depends on the discount you will be receiving and how long it will take you to recoup this expense. It is best to compare loan offers that include points with those that do not in order to get a feel for what this expense is doing for you. If the points do nothing for you, do not pay them. This is double true if the points you pay are simply being paid to your mortgage broker as a bonus. Make sure you find out exactly where the fees you pay are going. To learn more about finding the right mortgage and how to avoid overpaying for it, register for a free mortgage guidebook.