Points on a Mortgage   (top)

Points are an up-front fee paid to the lender at the time that you get your loan. Each point equals one percent of your total loan amount. Points and interest rates are inherently connected: in general, the more points you pay, the lower the interest rate you get. However, the more points you pay, the more cash you need up front since points are paid in cash at closing.

The more points (a point is equal to 1% of the mortgage amount) you are willing to pay, the lower the interest rate on the mortgage will be. So a basic decision needs to be made here, pay the points ($$$$) up front and save on the interest on the mortgage later, or save the money now and pay the higher interest rate as you go.

Below is an example of two mortgages. The first mortgage is a no points mortgage and the second mortgage has points paid up front. Note: in some cases the points can be "put back into" the mortgage, thus increasing the amount of the mortgage by the mount of the points paid on the mortgage.

* Monthly Payment includes Principle and Interest.

In the example above, the payment of 2 points, equivalent to $3,000.00  on the $150,000.00 mortgage lowered the monthly payment by $25.05 and saved a total of $9,025.58 in interest over the life of the mortgage.

On the third row in the table the $3,000.00 in points were put back into the mortgage, increasing the mortgage amount   $150,000.00 to $153,000.00 The monthly payments decrease from $997.95 to $992.36 a savings of  $5.59, while the interest over the life of the loan went down from $209,266.34 to $204,243.90 a savings of $5,022.34 in this case.

Bottom Line:  Look Beyond The APR
Don't just look at the APR of a mortgage loan.  The example above clearly shows how important it is to take into account the points on a home mortgage loan.  Depending on your situation, it can be better for you to pay points in order to get a lower APR.

How do you make the decision?

How long do you plan on staying in the house?
If you plan on staying in the house only a short period of time, the lower initial cost of less points or even no points would be the way to go. However, if you are planning to stay in the house for a longer period of time, a large amount of money can be saved by paying the points up front and saving on lower interest later.

Do you have the money to pay for the higher amount of points?
If you plan on staying in the house a long period of time, and you have the money to pay the points up front, it may be a good idea to pay the point(s) and save the interest. This can be a considerable amount of money over the life of the loan.

Does the point fee lower the APR enough?
If you plan on staying in the house a long period time and have the money to pay the points up front, the next question to ask is, Does paying the points to get a lower interest rate, lower the interest rate enough? This depends on how long you will stay in the house and how much a point will lower the interest rate. Generally a point will lower your interest rate by about 1/8 - 1/4 of a percent on a 30 year fixed rate mortgage and 1/4 - 1/2 a percent on a 15 year fix rate mortgage.

Points can be put back into the mortgage.
You may be able to "put the points into the mortgage". This means that the dollar amount of the points are added into the mortgage amount. One point on a $100,000.00 is equal to $1,000.00  So if you were getting a $100,000.00 mortgage with a 1 point fee put back into the mortgage, the new mortgage amount would be $101,000.00.

LoanWeb and BestRate will give you up to 4 mortgage quotes free when you fill out their easy online application. Always check the numbers on the various offers that they come back with. Carefully review these numbers to determine which combination of  points and interest rate best satisfies your needs.

Home Owner's Insurance   (top)

Before you can complete a home purchase, the lender will require that you take out a homeowner's insurance policy and prepay one year's premium at closing. Even if you can pay all cash for a home, you're wise to insure it against loss.

Insurance premiums can vary significantly from one company to the next, so shop around before making a choice. When making comparisons, be sure you receive quotes for equivalent coverage. Also, talk to people who recently made an insurance claim with a company you're considering. Did they receive prompt and dependable service? Consumer Reports magazine rated homeowner's insurance companies according to customer satisfaction in its October, 1993 issue.

In most cases, you'll want a guaranteed replacement cost policy which will pay to rebuild your home even if the cost to rebuild exceeds your policy limit.

Some insurance companies won't issue a guaranteed replacement cost policy on an older home. But insurance companies differ greatly on how they insure older homes. Also be aware when insuring an older home that many policies won't pay the cost to upgrade your home to meet current code requirements if you have to rebuild. You may be able to purchase an endorsement to cover the cost of code upgrades. An endorsement is an attachment to an insurance policy that changes the coverage.

Your insurance policy will have limitations on coverage. For instance, most policies won't cover loss from flooding, earthquakes or slides. You may be able to purchase endorsements to cover such disasters.

Flood insurance may be required by your lender if the home you're buying is in a flood-prone area. A federal government flood insurance policy can be purchased through the National Flood Insurance Program. For more information, call (800) 638-6620.

Most homeowner's insurance policies limit personal property coverage to 50 or 75 percent of the amount of insurance on the dwelling. If this is not enough, consider upgrading your personal property coverage.

Condominium buyers usually have insurance coverage provided through the homeowner's association. This coverage won't cover your personal possessions, liability or the interior of the dwelling. Make sure you understand exactly what is and what isn't covered by the association policy and arrange to get whatever additional coverage you'll need to protect yourself.

The amount of insurance coverage you'll need will change over time due to such things as improvements you make to the property, inflation and changes in building costs. You may want to consider adding an "inflation guard clause" to your policy which will automatically increase your coverage over time. Even if your policy has a built-in inflation guard, plan to review your insurance coverage annually and upgrade when necessary.

FIRST-TIME TIP: You can save money on homeowner's insurance by increasing the deductible amount on the policy. The deductible is the amount the homeowner pays on any given claim. How much you'll save by increasing your deductible from $250 to $1,000 will vary from one company to the next. But it could reduce your annual premium by as much as 25 percent.

THE CLOSING: Buyers often wait until the last minute to line up insurance coverage. This can be a mistake if the insurance carrier you have in mind refuses to insure your home. For example, USAA, a highly rated company, probably won't insure your home if it's an older one with nob and tube wiring. Other companies will insure such a house, but to get the best coverage for the best price