How can you get the interst rate on a mortgage lower?

That's a question for many first-time buyers, who are trying to squeeze every penny they can out of a tight budget. The difference of $100 a month on a home loan payment is money that could go towards car insurance or cable TV.

The good news is that there is a way to lower your interest rate – it's called paying points.

A "point," in mortgage speak, is one percent of your loan amount. Now pay attention to that sentence, because a point is NOT, as many people would assume, one percent of your home's purchase price. If you are buying a home that costs $350,000, and you put ten percent down, your loan amount is $315,000, so a point is $3,150.

There are actually two kinds of points – one is a fee that you pay to get your loan (which is usually called an origination point) and the other is a fee you pay to buy down your interest rate (usually called a discount point). A couple of years ago, when mortgages were easy to get and rates were low, paying points wasn't really an issue; you could get a great rate without them. Or you might take some kind of variable loan with a low starter (or "teaser") rate.

But in the current mortgage market, many buyers are shying away from those products. They would rather have the security and conservatism or a good-ol' fixed-rate mortgage. As a result, many buyers are finding it advantageous to pay discount points to get the best rate possible.

What you are effectively doing is prepaying your interest to the bank. In other words, if the bank is lending you $200,000 and they want $12,000 interest a year, they might offer you a deal where you pay $2,000 of that interest in the form of discount points up front, and $8,000 during the year.

 In this situation, the choice might be easy: $10,000 worth of interest all in sounds better than $12,000! But in reality, whether it makes sense to pay discount points has a lot to do with how long you end up staying in your home.

That's why it's a good topic of discussion for you and your mortgage broker, or you and your lending bank. In general, if you're going to be in a home for seven years, paying points is usually worth it. If you're looking at less than seven years, take the time to run the numbers.