They are so confusing and my brother is trying to buy a house.
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When paying a point or more it will lower the interest rate of the loan. This will cause the monthly payment to be lower.
#ELI5
The bank is making money off your mortgage. You pay back more than you borrow, so they make money.
Quite simply, they give you a CHOICE of how they make some of that money:
* Do you want to pay a slightly higher interest rate?
* Or do you want to pay an extra “fee” up front?
If you pay the higher interest rate, then you don’t pay the extra fee.
If you pay the extra fee, you can get a lower interest rate.
The fee is called “points”. It’s usually a percentage.
So it’s a tradeoff.
Why would someone choose to pay the points?
Maybe you have some extra cash. Putting that toward points gets you a lower interest rate over the length of the mortgage, and lower monthly payments.
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