Comtemplating the best option for your needs depends on various factors including how long you plan to stay in the house as well as how much additional cash you will have for your total closing costs after your downpayment requirement.

Points, which are ultimately included in your closing costs, are charges determined by your lender at the time of loan origination. To put points in perspective, 1 point is equal to 1 percent of the Loan Amount. For example; if a borrower needs a $120,000 mortgage at a certain preferred interest rate, and must pay 2 points to get the lower rate, then the borrower's closing costs will reflect an additional $2,400 in costs for points ($120,000 x .02 = $2,400).

To simplyfy the analysis as to whether or not paying points with a lower interest rate is the right thing for you, all you need is a calculator.

Letting  the calculator do the work, based on hypothetical interest rates as follows, consider the following:

A homebuyer needs a mortgage of $120,000

        Option A carries an interest rate of   7.0%  with three points ($3,600).

        Option B carries an interest rate of 7.875 % with 0 points.

Your monthly payments would equal $814.22 with option A and $872.16 with option B.

On a monthly basis, Option A saves the borrower $57.94 a month. Sounds great, but when you take into account the extra $3,600.00 in costs it may not be such a great deal. At a savings of $57.94 a month it would take a borrower 62 months (5+ years) to recoup the $3,600.00 additional costs. If you were going to stay in the home beyond 5 years, Option A would be the better choice, otherwise, Option B would be to your benefit.