What are points?

Points are up-front interest, and points cost you money. Lenders charge points as a way of being paid for the work and expense of processing and approving your mortgage. Lenders quote points as a percentage of the mortgage amount and require you to pay them at the time that you close on your home purchase and begin the lengthy process of repaying your loan. One point is equal to 1 percent of the amount that you're borrowing. For example, if a lender says that the loan being proposed to you has two points, that simply means that you must pay 2 percent of the loan amount as points. On a $120,000 loan, for example, two points cost you $2,400.

What is a prepayment penalty?

Some mortgages come with a provision that penalizes you for paying off the loan balance faster. Such penalties can amount to as much as several percentage points of the amount of the mortgage balance that is paid off early. When you pay off a mortgage early because you sold the property or because you want to refinance the loan to take advantage of lower interest rates, some lenders won't enforce their loan's prepayment penalties as long as they get to make the new mortgage. Even so, your hands are tied financially unless you go through the same lender. Many states place limits on the duration and amount of prepayment penalty that lenders may charge for mortgages made on owner-occupied residential property. The only way to know whether a loan has a prepayment penalty is to ask and to carefully review the federal truth-in-lending disclosure and the promissory note the mortgage lender provides you. Many so-called 'no points' loans have prepayment penalties.

What is the main advantage of a 30-year mortgage over a 15-year mortgage?

The main advantage that a 30-year mortgage has over its 15-year peer is that it has lower monthly payments that free up more of your monthly income for other purposes. A 30-year mortgage has lower monthly payments because you have a longer time period to repay it (which translates into more payments). A fixed-rate 30-year mortgage with an interest rate of 7 percent, for example, has payments that are approximately 25 percent lower than those on a comparable 15-year mortgage.