What are lender points and when might a borrower choose to pay them?

What are lender points and when might a borrower choose to pay them?

• A. Lender points are monthly charges for loan servicing.
• B. Lender points are penalties for early payoff.
• C. Lender points are upfront fees to obtain a lower interest rate; borrower may pay to reduce long-term costs if planning to hold the loan.
• D. Lender points are optional credits to reduce closing costs.

Answer: (C)

Lender points are upfront fees paid at closing to buy down the mortgage’s interest rate. Each point typically equals 1% of the loan amount and, in exchange, lowers the interest rate a bit, which reduces the monthly payment. You’d choose to pay points if you plan to hold the loan for a long time and want to lower overall costs over the years. The decision hinges on the break-even point: divide the cost of the points by how much the monthly payment saves because of the lower rate. If you’ll stay in the home long enough to reach that break-even point, paying points can save money in the long run. If you expect to move or refinance before breaking even, paying points may not be worth it. Points are not monthly servicing charges, penalties for paying off early, or credits to reduce closing costs. They are a deliberate upfront cost to secure a lower rate.

Lender points are upfront fees paid at closing to buy down the mortgage’s interest rate. Each point typically equals 1% of the loan amount and, in exchange, lowers the interest rate a bit, which reduces the monthly payment.

You’d choose to pay points if you plan to hold the loan for a long time and want to lower overall costs over the years. The decision hinges on the break-even point: divide the cost of the points by how much the monthly payment saves because of the lower rate. If you’ll stay in the home long enough to reach that break-even point, paying points can save money in the long run. If you expect to move or refinance before breaking even, paying points may not be worth it.

Points are not monthly servicing charges, penalties for paying off early, or credits to reduce closing costs. They are a deliberate upfront cost to secure a lower rate.