Mortgage price tags come in two parts. One cost is the interest rate; the other is points. A point is equal to one percent of the mortgage amount. With a $100,000 mortgage, one point would be worth $1,000. Generally, if you pay more points, you’ll have a lower interest rate, or if you pay fewer points you’ll have a higher interest rate. To determine which option is best for you, you’ll need to estimate how long you’ll own the home and decide the amount of the extra points by the dollar amount you would pay additional each month with the higher rate.
For example: You can pay one point ($1,000) at closing or no points, but $18 more each month because of a higher interest rate. If you own for more than 4½ years, the higher up-front payment actually represents the better deal ($1,000 divided by $18 equals 55.55 months or 4.5 years).