In a general way, points are basically paying a portion of the mortgage loan interest in advance in order to to have a lower interest rate on the loan, and lower monthly payment. One point equals one percent of the loan amount. Points are an important component of the cost of getting a mortgage. 1 Point = 1% of your loan amount.
You might pay points because of your particular scenario: Say you are buying a 2 family investment property. Odds are that you will have to pay points.
You could also choose to pay points to obtain a better rate. For any given loan your lender should be able to offer you a menu of rates with you paying no points (or even the lender paying you points) for a loan with a higher rate vs. you paying points to obtain a better rate.
Should you pay points? That depends on your intentions (Points make more sense if you plan on staying 10+ years) I generally recommend that you compute the cost of dropping the rate by 1/6% (.125%) vs the drop in monthly payment. Be sure to calculate your break even.
Additionally, Points can be a cost to you or they can be a credit to you. A point represents an amount of money associated with a specific rate. If, based on your qualifying factors, you earn a 4.5% rate with no points, you can then get a lower rate by paying points.
In contrast to that, you can also receive a HIGHER rate and get money credited towards you. Not every bank shows points in the same fashion but there are advantages and disadvantages to either paying points or getting a credit with points. Do your due diligence and speak with your mortgage officer (or several if you shop around) to find out which loan is best for you.
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