Juliana Bunim
Foreclosures are soaring and millions of ordinary people are struggling to pay their mortgages; subprime mortgages accounted for almost 1.3 million home foreclosures in 2007, up 79% from 2006.
One way to avoid joining that statistic is to understand the mortgage "point" system when you shop for quotes. The system sounds confusing at first, but is relatively simple. One mortgage point equals 1% of the overall loan, meaning a single point on a $100,000 loan equals a payment of $1,000. Therefore, one way to get a lower rate on a fixed-rate mortgage, is through paying "points" upfront. However, buying points and thereby reducing your mortgage's interest rates does not follow a 1:1 ratio. As a rule of thumb, each point paid will reduce your mortgage interest rate by .25%. That's just an estimate though, as it depends on the lender and the markets -- which is why it's important to not commit to a lender before knowing its final rate for points and reductions. Homebuyers typically can't negotiate a break on points, but they can estimate whether the points are worth paying, often by requesting and comparing multiple mortgage quotes. "To pay or not to pay the points boils down to a simple calculation that's determined by how long the person plans to be in the house," says Charles Failla, a Certified Financial Planner and Principal with Sovereign Financial. The longer you plan on paying your mortgage, the greater the benefit of having a lower interest rate. "If you're only in the house for five years, it won't offset the points you paid," says Failla. "But if you'll be in for 15 or 20 years, and can afford to pay the points up front, most definitely do it."
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