Loans are priced as an interest rate (or borrowing rate),
typically in 1/8th increments. The interest rate is the rate charged on the loan to
calculate the interest portion of the monthly payment. The Annual Percentage Rate
(APR) is the cost of money borrowed expressed as an annual rate; it includes certain
closing fees and the origination fee and may also include expected lifetime changes to
the interest rate.
To compare one loan to another, borrowers should look at the APR or the combination of the interest rate and total closing costs.
Points
A point or a percentage point is one percent of the total loan, 1.00%; a half a point is 0.50%. Paying points allows you to "buy down" your interest rate.
Although your closing costs will increase, your monthly payment may decrease - with a lower rate and less cost in finance charges over the life of
your loan.
Points are only a good option if you plan to stay in your home long enough to gain from the lower finance charges - as they will eventually cover the
additional cost of paying the points upfront - and then some.
