Points

A point is a measurement that equals one percent of the entire loan in question. Points are paid upfront and used to decrease your interest rate, as well as decrease the total amount of interest paid over the life of the loan. The essential trade of paying points is money now versus money later. A loan with no points will have a higher rate and total interest than a one point loan, for example.

One factor in deciding whether to pay points is the length of time you plan to keep the loan. An important point to mention is that paying points up front only makes financial sense if you plan to keep the loan long enough to recoup the investment through lower payments each month. This length of time is usually approximately four years, though this can vary depending on your loan. If you plan on moving or think it is a distinct possibility within the next four years, paying points may not be a good idea for you. Also, if the market is such that you think you will likely want to refinance within the next four years, a no point loan might also be a better option.

While paying points isn't a necessity, it is a good idea if you are considering a loan that you plan to keep for an extended period of time. Even though you will have to pay a higher price upfront, you will save money in the long run by decreased interest payments over the life of the loan.

Lenders often offer a variety of rate and point combinations for the same loan product. That's why you should be sure to compare rate and point combinations when comparing rates from other lenders. APR can be a valuable tool in comparing varying terms, rates, and points from different programs and lenders.