Applying for a mortgage these days can be quite confusing. Especially when your lender starts talking about Points on your mortgage. If you are like most people, you are thinking to yourself, "what is he talking about?". To help clear up the confusion here is summary of mortgage points.

Your mortgage lender will use points as a type of up-front discount and tie them to the interest rate of the mortgage.

A point in a mortgage is equal to 1% of the loan amount. For example, for a mortgage on a $200,000 home, each point would cost $2,000. Each point would lower your interest rate by .125%.

Using the $200,000 mortgage example, your lender might offer you a mortgage with a rate or 7.0% with no points, or 6.875% with one point, or 6.75% with two points. Points can make a mortgage rate look low, while in reality the actual amount paid to the lender is higher because of a large number of points which must be paid.

Points are usually an up-front payment made at the closing on your new home. This is in addition to your down payment and other closing costs. However, due to customer demand, many lenders are now willing to allow you the finance the Point's costs over the term of the mortgage.

Should you pay Points up-front or finance them?

The answer is up to you. Paying more toward the mortgage up-front will lower your monthly payments. However, paying more at the closing will leave you with less money in the bank to remodel your new home.