So if you have a 5% loan where you borrow $200,000
You could pay 2 points ($200,000 x 4%) = $4000 to lower the rate from 5% per year to 4.50% per year. The points basically give the lender some instant profit for lowering the loan interest rate.
It looks like you've gotten some pretty good answers and I hope they've cleared up any questions you may have. If you are interested in house listings, I service Merrillville and the surrounding areas and would be glad to help. You can reach me my email or cell.
Bill Vossos - Associate Broker
Century 21 Executive Realty
219.680.9037 - Cell
There are two different kinds of "Points" to be aware of. One is a fee charged to originate your loan charged by the lender or broker as a means of obtaining their wholesale rates. This is a brokerâ€™s primary compensation.
The other are Discount and or Rebate points. Rates are actually the same every day, it's the fee attached to a given rate which can change multiple times a day. On any given day 4% may be available for a 30 year fixed rate loan. If "rates" are down it means that to obtain 4% you may not have to pay any discount points or may even get a rebate from the lender. If the fee associated with a rate is high, say it costs 2 points to obtain 4%, you would likely be better off accepting a higher rate without a fee, for example 4.375% no points.
As others have said, one point is equal to 1% of your loan amount. One point on a $200,000 loan would be $2,000.
In most cases, paying points for a lower rate doesn't pay for itself in the short to medium term. Talk to your lender about their recommendation when it comes time to lock your interest rate. I hope this helps.