What are points and should I pay for them? When you apply for a loan, the lender will give you the option of how many points you want to pay. Each point is 1% of the mortgage amount that you are applying for. So, if you are applying for a $200,000 mortgage, and opt to pay one point, your closing costs will go up by $2000. On the average, each point paid will reduce your interest rate by about ¼%. This is called a permanent buy-down.  The question of paying points is a personal one. Usually, if you look at the savings that you receive per month by paying points (regardless of whether you pay one or more points) and compare it to the amount it costs up front, it will take an average of 6 years to recoup your investment. Therefore, if you have the funds, or can get the seller to pay them, and intend on staying in the home in excess of 6 years, you might want to consider them. Statistically speaking, your will be moving or refinancing the loan in under 5 years, and they don’t make sense. Some grant programs do not allow the buyer to pay points… but the seller can. Points can also be used for a temporary buy-down. This means that the interest rate is reduced substantially for the first year or two. A 2/1 buy-down usually costs about 2.75 points. If you took this option, and your base rate is 6.5%, the lender will give you an adjusted rate of 4.5% for the first 12 months, and then an adjusted rate of 5.5% for the next 12 months. After that, the rate will stay at 6.5%.  Are you actually getting a financial benefit from a temporary buy-down? The answer is no. If you calculate the savings for the first 2 years, and compare it to the cost, they should be the same. It is done for psychological reasons, to ease you into a payment. Lets say that you are use to paying rent of $1000 a month, and your new mortgage payment is going to almost double, the buy-down gives you 2 years to adjust to the “housing payment shock”. Also, if you are in an entry level position at work and expect major increases in income over the next year or two, this program allows you to stretch yourself into a large home, without waiting for the pay increase before you buy the home.