A point (1%) of the total loan amount is an up-front fee that lowers your monthly interest rate and total interest due over the life of the loan. A one point loan will have a lower interest rate than a no point loan. When you pay points you are trading off paying money later in favor of paying money now.
There are several things to consider when buying points. How long your going to stay in your loan? If it’s the final loan on the property, then you may want to buy the lowest interest rate possible.
The loan programs that usually make sense to consider buying down the rate with points would be the 30, 20 or 15 year fixed. By selecting a long term fixed program, you are indicating that you plan on keeping your loan for a long period of time. By buying down the rate, you can save money over the long haul.
When deciding whether or not to buy points, also consider all the other costs involved with your new loan. Sometimes buying points may eat up more of your home’s equity and you may not feel comfortable with that. If you are refinancing, it is usually a good idea to leave some equity in your home in case of emergencies or the need to sell quickly.