Mortgage points are bought by someone purchasing a home or other property. They are also called discount points because they essentially buy the privilege of a lower interest. It is a strategy that some buyers agree to because they intend to keep the property for a long time and wish to save money in the long run. The deal is entered into with the bank or other lender who might like the idea of cash in advance. A standard point represents a fraction of a percentage, and eight points removes one percentage from the annual interest rate.

Percentage points represent a gamble for the home owner. Mortgage points represent an advance on interest. If they keep the home long enough, then they will actually save on interest. If they are forced to sell a home in only a few years, then the money they paid to the lender will not be recovered. A person who frequently shifts between homes, or is buying a property in the hopes of making a profit, will want to buy a home without paying any advance.

Points can be an incentive for a homeowner to hold onto their property fo
r a while, and is an incentive to not default. An early default would cost the buyer of points even more money. Points are also a way to give preference to serious buyers rather than speculators. Banks do not like to reclaim homes at a loss, so they benefit from this method. If the lender must reclaim the home, prepaid interest might offset any incurred losses.

Points may be beneficial to homebuyers or may not, and they must calculate the possible advantages. Do they intend to stay in town for a long time? Can they rely on their current job? The most important consideration is to look at the likelihood of having to move or otherwise go through a financial upheaval. If their financial future is looking bright, then that can be a green light to take gambles. Otherwise, it would be much smarter to apply the same money towards equity.

The real dilemma is whether to buy points that will offset the long-term interest, or apply the same money toward the value of the home or any other loan. Paying off a home faster will save a lot of money, too. It is a good idea to bring a mathematician or an accountant with you, or else be good with figures yourself.