Mortgage shoppers naturally want to lock in the lowest mortgage rates possible. However, the fees associated with your loan are an important reason why you shouldn't shop for a mortgage simply based on the lowest interest rate available.
How points affect your interest rate
The largest set of fees associated with any mortgage are what's known as points, which can -- and do -- affect the interest rate on your loan. If you're willing to pay what are known as "discount" or "origination" points, you can reduce or "buy down" your interest rate. On the flip side, there are also "rebate" or "negative" points. The way rebate points work is that if you can't or don't want to pay your closing costs out of pocket, you can take a higher-than-market interest rate that will substantially reduce or even zero out your closing costs.
"You can take a loan with no closing costs, but what you're asking is to finance those costs," says Justin Lopatin, vice president of mortgage lending at PERL Mortgage in Chicago. "You're taking a slightly higher rate, and you're paying the costs every month in that rate."
A point is an upfront fee equal to 1 percent of your loan amount. For example, if you borrow $200,000, one point is $2,000, half a point is $1,000 and a quarter point is $500.As a general rule of thumb, a discount point paid today usually shaves no more than a quarter or eighth of a percentage point off your rate. The ratio isn't constant and changes with market conditions, interest rates and between lenders.