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Points are a form of a prepayment penalty in disguise for the uninformed. From calculations I did back when I refinanced, paying points upfront, or not paying any points at all, results in the same total $ over the term of the loan if you make normal payments. The difference is that because you pay some of the interest up front in the form of points, if you pay off any principal early, you end up paying a higher effective interest rate for the time you borrowed that money. So points are smoke and mirrors to make you "think" you are getting a better deal than you are, but benefits the bank, not you.
If you have extra money when buying a home or refinancing, it would be to your advantage to make a larger down payment than to pay points.
Points are interest, but it is pre-paid interest, that is interest at the time of lending instead of interest accrued while you have the loan. It is also a one time payment, rather than ongoing during the life of the loan. A point is one percent of the value of the loan. In return, the lender offers a lower interest rate during the loan period.
The lender is lending less money, by the amount of the points. The lender wins when the loan is paid off early. The buyer is advantaged by less interest paid over time. Loans get paid off early by the sale of the home or a refinancing of the loan. The lower interest rate will vary between 0.125% and 0.25% per point (an 1/8 to 1/4 %)
$100K at 5% over 30 years has payment of $536.82 per month.
$93,256.48 interest is paid plus $100,000 principal
$100K at 4.75% over 30 years has payment of $521.65 per month.
$87,791.79 plus $1000 = $88,791.79 interest over 30 years
But, refinance or paid off in 4 years and
$18,402.56 plus $1000 in interest paid = $19,402.56 and only $99,000 was loaned to get it.
instead of $19,397.42 in interest on $100,000 loaned on the other.
The lender wins.
Points are basically a fee you pay the bank in return for a lower interest rate. You give the bank money up front, and you then have a lower interest rate over the life of the loan. One point is 1% of your loan. So if you were going to take out a $100,000 mortgage, 1 point would be $1,000. How it would work is a bank may tell you that they're willing to loan you $100,000 at 5% interest rate, but if you're willing to pay 1 point, and give them an extra $1000 up front, they will charge you 4.75% interest rate.
They are up front fees that boost the banks profits