Reading mortgage quotes is really quite simple since they contain only 3 parts.

Here is an example of a typical quote format

Most people know what interest rates signify, but get a little fuzzy when it comes to what points and origination fees really mean.

Think of POINTS as a type of downpayment.
When you pay points you are paying a downpayment on your interest rate. The larger the downpayment the lower your monthly payment. BTW points are a tax write off to the Buyer even if the Seller pays them.

The ORIGINATION FEE is what the mortgage company charges for originating the loan and, just like points, the value is expressed as a percentage. A figure of 1 is actually 1% of the loan amount. On a $100,000 loan that means the origination fee would be $1,000.

It will help if you think of a mortgage as a commodity or a tangible product.
Virtually all loans are now made with the capacity to be sold later. There are very few direct lenders left in business (lenders who make the loan and keep it forever). The direct lenders left are typically more expensive &/or are for specialty products or needs ("B" loans). Most of the direct lenders have become indirect lenders and only offer their products thru Mortgage Brokers and not to the general public.

Think of us as a Department Store for money.
Just as a regular Department Store carries many different brands of jeans, we carry many different brands of money. Some brands of jeans fit skinny people, some fit larger people. There are jeans for active young people and jeans for us more sedentary older types. Some have zippers, others buttons. There's prewashed, acid washed as well as plain ol' blue jeans. In this manner the Department Store has jeans for almost every body. In this same fashion FINANCIER$ has loans for almost Everybody. We have many different loan types and terms to fit almost every situation.

We are not an Agent of these Investors/Wholesalers/Secondary Markets but instead act as an Independent Contractor. This means we do not have to try to sell you a house brand of loan that doesn't exactly fit your needs as a direct lender would (which is why they are typically out of business or else one of our suppliers). In this way we strive to assist you in the meeting of all your financial needs by being able to offer you a variety of programs.

The Wholesalers whose loan products we distribute generally provide their loan products to us at a wholesale rate. The retail price FINANCIER$ offers you includes our compensation so there are no additional fees to you.  Think of us as more of a Walmart than a Neiman Marcus.  Our rates are typically less expensive than what the Direct Lenders would have been offering to the public - if they still had a retail department.  Why are our rates cheaper?  We have much lower overheads and can operate at much lower profit margins than the big companies have to. 

YOU HAVE A CHOICE!
You can pick the interest rate/cost combination that best fits your needs.

The bolder Zero Point loan in the middle is the most commonly chosen option.
(See you have learned something, you knew what I meant when I said Zero Point loan)

In this example you will see that each point bought down the interest rate 1/8%. (see also Loan Types) Notice the lower rates didn't lower the payments very much.

You can pay points and buy down your interest rate or take a higher rate and lower your costs.  You will also notice that at 7.875% the lender paid points to you which could be used to pay part of your closing costs. The next section will help you choose the best option for your stituation.

Looking at the chart you can see that loan amount has a much bigger impact upon your payment than does the interest rate. So you shouldn't worry overly much if rates are rising or falling by small amounts while you are out looking for a home. Also don't worry if rates fluctuate slightly after you lock your interest rate. You won't have lost or gained much no matter which way the market moves.

Now that you see how rates and points relate to each other you should be able to interpret different quotes. If you see a quote without points or origination fee you will know how it was done, they raised the rate, and your options. You don't get anything for free!

Of course there is one other way a mortgage company can make a quote seem better than it really is, they could add a prepayment penalty. Since Lenders all dip from the same FNMA/FHLMC money well the rates should all be the same if we know the same information. If someone's rate seems better than the others there is something different about that loan. So be careful that you are comparing apples to apples. We'll never slip a prepayment penalty in on you, but we have heard tales . . . . !

Like the post office says "If it sounds too good to be true, it probably is!"

So in the example above which would be the best choice for you?

That depends totally upon your situation and the interest rate structure at the time you lock your loan. In the above example, if you were to buy your rate down from 7.625% to 7.5% you would receive a savings of only $8.58 a month, but you would have the additional upfront cost of 1% or $1,000. If you divide $8.58 into $1,000 you find it would take over 116 months, or almost 10 years, to recover your $1,000. So how long do you intend to stay in the property?

Keep in mind that any points you pay to buy down an interest rate will be in addition to your downpayment, normal closing costs and prepaid items.