What is the primary role of points in relation to loan financing?

Points serve primarily as a method of prepaid interest on a loan. When a borrower pays points at the closing of a mortgage, each point typically represents 1% of the total loan amount. This payment is often made to reduce the interest rate that the borrower will pay over the life of the loan. By choosing to pay points upfront, borrowers can lower their monthly payments and overall interest expense throughout the duration of the loan.

This practice allows borrowers to make an upfront investment in exchange for a more favorable interest rate, which can lead to significant savings if they plan to keep the loan for a long period. The flexibility that points provide can be beneficial for borrowers who have the funds available at closing and who want to manage their long-term interest costs effectively.

Understanding the role of points in loan financing is crucial for both borrowers and real estate professionals, as it can directly influence the overall cost of borrowing and the financial decision-making process involved in securing a mortgage.