When you’re shopping for a home loan, you’ll probably discover that the lowest advertised mortgage rates aren’t free — they might come at a cost of one or two discount points. (Each point is equal to one percent of your mortgage amount. Typically, mortgage lenders charge one point to originate the loan, and any extra points are referred to as “discount points” because their purpose is to lower the interest rate.) Paying points is called “buying down” your mortgage rate.
Mortgage pricing works like this: The less you pay upfront, the higher the interest rate, and the more you pay upfront, the lower your interest rate. For a 30-year fixed-rate mortgage, every discount point that you pay typically lowers the interest rate by .125 to .25 percent.
So, are points that you pay upfront worth the cost? There are a couple of ways to look at it.
First, you can compare the APR …