Points
In the context of credit and lending, points refer to the upfront fee paid to a lender at closing in exchange for a lower interest rate on a mortgage.
Example #1
John decided to pay two points on his mortgage to lower his interest rate by 0.5%.
Example #2
Susan chose not to pay points and accepted a slightly higher interest rate on her home loan.
Misuse
Misuse of points can occur when lenders pressure borrowers into paying excessive points to secure a loan. This can result in borrowers paying unnecessary fees, increasing the cost of borrowing. It is important for consumers to be aware of how points impact the overall cost of a mortgage and to compare different loan offers before agreeing to pay points.
Benefits
Paying points can benefit borrowers by reducing their long-term interest costs, especially for those planning to stay in their homes for an extended period. By paying points upfront, borrowers can achieve savings over the life of the loan.
Conclusion
Understanding points is crucial for consumers as it directly impacts the overall cost of borrowing. It is essential for borrowers to assess whether paying points aligns with their financial goals and to be mindful of potential pressure from lenders to pay excessive fees.