When you go to get home financing, your lender will quote you an interest rate and it will usually cost you around 1 point, or 1% origination (both mean the same thing) to get that interest rate.  You can opt to not pay any points if you would like but your interest rate would be higher.  1 point is equal to 1% of your loan amount, so if your loan amount is $300,000 you will have to pay $3,000 for that interest rate.  Generally speaking, it usually makes more financial sense to pay the point if you’re planning to keep the loan for more than three to five years.  If you think that you’re going to refinance or sell your home in a couple years then it usually doesn’t make sense to pay the point.

Here is the best thing to do, have your lender quote you a rate with paying the point and then the rate with not paying the point.  Then take your origination cost and divide it by the difference in your monthly payments.  That number is the number of months it will take you to make up for the cost of the origination.  Which mean every month after that you will be saving because you paid the point.  Here’s an example:

$300,000 loan

Origination (or 1 point) will cost $3,000

The interest rate with paying the point will be 6.125%, so your payment will be $1822.83

The interest rate with not paying the point will be 6.5%, your payment will be $1896.20

The difference is $73.37/month.

So take $3,000 and divide it by $73.37 and you get about 41 months.  So after 3 and a half years (41 months) you will make up the cost of the origination which means ever month after that you will be saving $73.37 because you paid the point up front.

Also something to remember, your origination cost is tax deductible…make sure you talk to your CPA about it for the details though!