Mortgage brokers and loan officers make the majority of their income when your loan closes.

They are compensated either by you, by your lender, or by the seller (in a purchase transaction). If you are barely able to come up with the down payment and closing costs on a purchase or in desperate need of all of the proceeds from your cash-out refinance, you probably can’t afford to spend a lot of cash to lower your rate. One “point” is equal to exactly 1% of the loan amount.

If you are offered a “no closing cost” or “low closing cost” loan, your are basically financing those closing costs over the term of the loan. Make sure that you know how much you are paying in closing costs when you are quoted an interest rate. Closing costs can vary greatly and if you are getting competing offers from different lenders, make sure you know the interest rate, closing costs, loan type, etc. Not only do you need to be comparing apples to apples, you need to be comparing similar types of apples.
Recommmended Mortgage Lenders:

Lending Tree
- Bad Credit OK
- Purchase, Home Equity & Refi
- This company provides up to 4 loan offers from one application. They provide quick approvals and are one of the largest loan companies on the web. We recommend applying here first.

Paying Points Means a Lower Interest Rate

Generally, the more you pay in points, the lower your interest rate, and vice versa. For example, if you are quoted 7.5% with no points, and your broker plans on making a 1% commission on your loan, your rate was probably available to your broker at 7.0%.

The lender will quote your broker or loan officer at a wholesale rate and you pay a rate that may have been marked up, similar to paying for merchandise at a retail store rather than paying direct from the manufacturer. The lender will offer to pay your broker what is referred to as a yield spread premium in exchange for charging you a higher rate. On a $200,000 loan, for example, if your rate is available for 7.0%, you can offer to pay one point in cash at a cost of $2,000. If you are purchasing a home, that $2,000 can be paid by you directly, by a friend or relative, or even by the seller if you or your real estate agent can negotiate that in the purchase contract. If you are refinancing your home, that $2,000 can come from the proceeds of the new loan or paid by you in cash.

When Should You Pay Points?

There is no golden rule to determine when paying points down makes sense and when it would be better to pay a higher interest rate. The general rule of thumb has been that if you plan to keep your loan for more than five to seven years, it’s best to pay points to lower your rate. However, this is always a case-by-case basis, depending on the loan amount, the monthly savings on a lower interest rate, etc. Ask your broker to give you different options of paying points versus paying a higher interest rate. There are a large number of point/rate possibilities Your broker should be able to give you fairly sound advice on what option is best for you. Much of it depends on how long you plan on retaining the loan.

Paying Money Upfront Can Save You In the Long Run

If you can afford to pay points at closing and plan on retaining your loan for at least five years, paying money upfront may save you a lot in interest. Generally it makes more sense to pay points on a fixed rate mortgage, rather than paying points to lower a rate that will be adjusting in two or three years anyway. If you can afford the monthly payment that comes with the higher interest rate, it is often more feasible to finance those origination/broker fees into the loan, especially if you do not plan on keeping the loan for a long time. This is especially true for first time homebuyers with less than perfect credit who need all the cash they can get to make a down payment.

Recommended Refinance Lenders:

Lending Tree
- Bad Credit OK
- Purchase, Home Equity & Refi
- This company provides up to 4 loan offers from one application. They provide quick approvals and are one of the largest loan companies on the web. We recommend applying here first.

Paying Points When You Refinance For a Lower Rate

If you are refinancing primarily to lower your rate, you will probably want to use proceeds from the loan to pay for the closing costs which can include points. If you have some equity in your home available and want to reduce your interest rate, this is an excellent way to lower your monthly housing payment.