Points are fees that the lender or broker charge as a percentage of the loan amount. It is equal to 1% of the loan amount and the borrower pays them upfront. Points are also known as loan discount points.
The primary purpose of paying points is to lower the interest rate on the loan. By paying points, borrowers can “buy down” the interest rate. It can result in reduced monthly mortgage payments over the life of the loan. The more points the borrower pays upfront, the lower the interest rate typically becomes.
Paying points can be a beneficial strategy for borrowers who plan to stay in their homes for a long period of time. The interest rate reduction obtained by paying points can result in significant savings over the life of the loan. It becomes an attractive option for borrowers who intend to hold onto the property for an extended period.
It’s important to note that the decision to pay points should be carefully evaluated, taking into account factors such as the borrower’s financial situation, the length of time they plan to stay in the home, and the potential savings achieved by paying points. In some cases, paying points may not be financially advantageous, especially if the borrower plans to sell or refinance the property within a short time frame.
Before deciding to pay points, borrowers should discuss the options with their lender or mortgage broker, considering the overall costs, potential savings, and their long-term homeownership plans.
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