If you shop online for a mortgage, you will quickly run into a low rate with points. Mortgage lending can be extremely complicated. Points can further cloud the mortgage shopping waters. Let’s dig in a little and shed some light on mortgage points.

You pay points to get a lower rate

Points are percentages of the loan total that you pay upfront to buy-down your final rate. For example, you may see a mortgage loan advertised as 4.75 percent for a 30-year fixed mortgage at Bank A. Bank B might offer a five percent rate for the same term.

Without knowing more, most people would go with Bank A. A quarter of a percent adds up over time. On a 30 year $200,000 mortgage with a 5 percent rate, you pay $186,500 in interest. That same loan amount and term with a 4.75 percent rate means your total interest is shaved down by about $11,000 over the life of the loan.

Lower rate savings add up

If Bank A’s loan requires one point, that means that at closing you will pay one percent of the loan — $2,000 in this example. For some, paying $2,000 to save $11,000 is a pretty good deal.

But, we need to scrutinize the loan further. Are you planning on keeping the mortgage for the entire 30-year term?

Many people refinance or sell before their loan term expires

If you move within, say five to ten years after taking out the mortgage, you will not likely recoup the cost of the points. Even still, some people want to have the lowest loan payment possible for budget reasons.

Points can range from any amount, but banks usually offer them in increments of half points, such as .5, 1, or 1.5. Before you sign up for that lower rate, figure out if the savings over time is worth the upfront cost.