What are points? A point is 1 percent of a financial product. In the case of a mortgage, a point is 1 percent of the loan amount. Points are a part of the fee paid to the broker and lender at the closing of the loan.

Not to be confused with the loan rate itself, points are reflected in the difference between the loan rate and the APR, or true cost of the loan. The points determine the competitiveness of the loan rate between brokers and lenders and can be used to leverage the cash on hand of the borrower for short-term or long-term advantage.

What factors determine points? The lenders' fees and discount points. Lenders' fees are the costs which the lender determines to close the loan. These fees include such items as a credit report, appraisal fee, title insurance, and more. These fees may vary as much as $500 or more from broker to broker and lender to lender, so it's well worth your time to do some comparative shopping. They're outlined on the good faith estimate which any lender or broker will give you as you shop for loans.

Additional points also may be paid by the borrower to get a better rate on the loan. Not all states offer this option, so an explanation of the advantages and disadvantages might be helpful.

LoanGuide.com's President Casey Fleming says, "In many parts of the country such as the Midwest, they don't pay points at all. In California, it is an option. We are getting loan applications all over the country, and most people have never been presented with the opportunity to consider points.

"What it does for the borrower is that you pay more up front and save money on the monthly payment, but that depends on how long you want to keep the loan. I tell borrowers it will take three to six years to save enough money to pay your up-front costs. If your payback is three years, and you're planning to stay in the house five years, buying down the rate makes sense."

Doug Galen, vice president of marketing for E-Loan, explains the situation another way: "You can either pay the points up front, or they could be added to your interest rate. If you had two 30-year mortgages, one with zero points, and one with one point, the one-point interest rate would be lower.

"You aren't really buying down the loan ... just when you pay the lender's profit. If you are going to live in the house for a long time, it is cheaper to pay the points up front. If you know you'll only be there a couple of years, you don't want to pay the points up front."

E-Loan has a feature on its Web site that takes any two loans and compares the difference. "If you pick any loan product, we give you four options with every one. The first will have one or two points paid up front for the lowest interest rate possible, the next group is one-half to one point, the third is for people who don't want to pay points, and the fourth offers a rebate. Check to compare, and you can do an analysis.

"We had an interest rate spook recently which shot the rates up .25 basis points," Galen adds. "A point is equivalent to a quarter in rate. So you need to really look at two prices -- what is the rate, and what are the points?"

By law, lenders must quote the APR to the borrower, but the APR doesn't disclose the points or the interest rate. To get a true picture of the cost of doing business with a particular lender, you must compare the rate with the APR. Most lenders will charge between 3/8 to one point to originate a loan.

To buy a better rate, you can pay more points up front, which allows the lender its profit when it resells the loan to a loan servicing company. The only time this doesn't happen is when you deal with a company such as Home Savings of America, which services its own loans. In that case, the difference between the loan rate and the APR could be as little as .05 percent.

Tim Chamberlain, a loan officer with Home Savings of America, says, "It pays for consumers to ask all three numbers -- the loan rate, the APR, and the points. Lenders aren't required to give any number, but the APR can hide the amount of points a lender is being paid. You want to know exactly how much you are paying, not only up front, but over the term of the loan."

Galen elaborates: "The market doesn't look at APR, although many times that is the only number we put due to space confinements. APR is favorable to high-point loans because the points are amortized over the life of the loan ... 30 years. A loan with high points will give you an artificially low APR. A low ratio between the rate of the loan and the APR indicates there are not a lot of points. I believe that in this market, a high-point loan is a mistake."

Chamberlain advises, "Insurance and real estate industry averages indicate that most people only stay in their homes about five to seven years, so putting that much money up front isn't necessarily a good investment. You are much better off putting that money into an interest-bearing account or making extra payments toward your principal. Otherwise, as you move from home to home, you aren't building any equity. The first five years of a loan basically goes to interest payments, so you aren't reducing your principal by buying points."

"The bottom line is you can't hide from the lender's fees. They always show up at closing," Fleming cautions.

To assure the best rate possible to meet your needs, check loan rates on the same day between direct lenders, mortgage brokers, and lenders who service their own loans. You may be surprised at who shows you the most value when you're ready to lock in your rate.