Should you pay points?

First, let's define what points are:
Mortgage points are how your loan originator gets paid (origination points), and they are also a tool you can use to lower your interest rate on your loan (discount points). In a nutshell, the more points you pay, the lower your interest rate, and vice-versa. When lenders quote 8.5%, it is usually under the assumption that you will be paying a 1% origination fee. This means 1% of the cost of the loan is charged to you at the time the loan is funded. You could probably opt to take a rate of 8.75% and not have to pay that fee out-of-pocket, and the lender would pay it instead.

Deciding whether or not to pay points on your Mortgage loan is similar to deciding if you want an extended warranty when you buy an appliance. Before you can accurately assess what your options are, you have to make an educated guess on how long you might own the home! You must then determine how long it will take you to "earn back" your expense by the amount you will save in terms of your monthly payment.

First, you have to figure out what your rate would be if you did not pay any points and write that figure down labeled as "no-points". Your next step will be to determine what your monthly payment would be if you were to pay one origination point. Then write that figure down as (you guessed it--) "points". Then write the dollar amount you would pay in points & label that figure—"cost". To find your savings each month subtract "points" from "no-points" and label the result "savings". Now multiply your "savings" by the minimum number of months you plan on owning the home to arrive at "total savings". If "total savings" is higher than "cost" you should pay the points required to get that rate. If the figure labeled "cost" is higher than "total savings", do not pay points, and pay the higher rate. 

For the most part, you will find that if you are going to own the house less than 3 years, you should not pay points. If more than 3 years, you will most likely be better off by paying the point.