Points that banks, mortgage brokers and hard money lenders charge are really additional interest charges. One point equals one per cent of the loan amount.
Example : 1 point on a $100,000 loan would equal $1,000
2 points on a $70,000 loan would equal $1,400
Let’s say that you can get a first mortgage at a 7.25% interest rate. But to get this rate the bank would charge you 2 points on the loan amount being lent to you. So your real interest rate to the bank isn’t really the 7,25%, but the 7.25% plus the 2 points. So your rate with the 2 points might actually be 7.675%. Don’t ask me to do the math on how I came uup with the 7,675% cause I didn’t actually do the calculation.
Phil is right, but further explain. Points are used when the interest rate you want, or the one that is quoted is lower than where the market interest rate is. You pay points to get an interest rate, that those with the money don’t really want to lend at.
Then when loan officers get greedy they will try to add a point or a half, or whatever they can, because they are on commission, and whatever extra they can make they get to keep (or at least most of it depeding on their split).
Points are also used to make a little extra money on low loan amounts (usually anything under $100k or $125k or so). Also, they’ll charge points for any other type of reason a lender wants, one of the most common is to lessen what they percieve as a potentially greater loan risk, i.e. less than great credit, self employed, whatever.