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Remember the story of the Pied Piper?

One day a piper came to the village of Hambelen. He offered, for a fee, to rid the town of its mice and rats. Since the village had been overrun with such vermin for quite some time, the town council eagerly accepted the piper's offer.

So the piper began to play a melody on his pipe. It was an eerie melody that enchanted the mice and rats, and they followed the piper to the river where they drowned.

Once the little animals were gone, the villagers immediately forgot how terribly bothersome the little creatures had been. They regretted having promised so much money to the piper.

So when the piper came to collect his fee, the town council refused to pay.

The piper put up no fuss. He simply played a new melody on his pipe, one sweet and playful. One that enchanted the children of the town. And the piper led the children into the mountains where they were never seen again.

While the story of the Pied Piper is for children (though it's hard to imagine that this disturbing little story suits children), the Pied Piper illustrates a very important aspect of mortgages, one I call the "pay me now or pay me later" principle.

The most drastic application of the principle happens when people default on their loan. When people "hire" the services of the mortgage company -- the service of "renting money" -- they agree to pay the company for its service. If at some point they fail to pay "now" with regular monthly payments, the mortgage company will force them to pay "later" through a foreclosure.

But there are other applications of this principle that are far less troublesome and far more appealing (and they may not even keep you awake at night). Let's look at one.

When a mortgage company loan representative quotes you the costs for taking out a mortgage, the quote includes two parts:

1. The interest rate

2. An additional cost called points.

The interest rate specifies how much of each month's payment goes to pay for your rental of the borrowed money. The amount you pay in a year is roughly equal to your outstanding loan balance at the start of the year multiplied by the interest rate. This calculation is only approximate, because your outstanding loan balance goes down a little each month with each payment you make.

On the other hand points are an amount you pay when you first get a loan. Like the interest you pay, points are just another cost of borrowing the money.

Really the only difference between points and interest is the timeframe in which you pay the money. Points are paid upfront; interest is paid throughout the load period.

What some people don't realize is that, when you apply for a mortgage, you can get a different interest rate by varying the points you pay. As points increase the interest rate decreases, and vice versa.

This relationships between interest rate and points nicely illustrates the pay me now or pay me later principle. By paying additional money (as points at the start of your loan) you can pay less later (as interest with each monthly payment). Or you can pay less to start and have a higher monthly payment. The principle applies to many aspects of mortgages.

When you purchase a mortgage, you sign up for a huge commitment. Taking the time to choose your mortgage carefully is time well-spent. As you consider different loans, think of them in terms of the pay me now or pay me later principle. This will help you figure out which is the better deal. If your upfront costs seem low, look for higher future costs. If your future costs seem low, you must be paying high upfront costs. Remember -- the Piper gets paid one way or the other.