What is the purpose of points in mortgage financing?

Points in mortgage financing serve as a form of prepaid interest that borrowers can pay upfront in exchange for a lower interest rate over the life of the loan. Each point typically equals one percent of the loan amount and paying points can lead to significant savings on interest payments over time. By paying these points at the closing of the loan, borrowers essentially "buy down" their interest rate, which can result in lower monthly payments.

This option aligns with the common practice in mortgage financing, where the arrangement of points directly impacts the cost of borrowing and aids in making more affordable payments. This strategic payment can appeal especially to borrowers who plan to stay in the home for an extended period, allowing them to recoup the upfront costs through savings on interest.

Other choices do not accurately describe the function of points. For instance, they do not increase the loan amount, reduce application time, or eliminate the need for an appraisal, as these factors are governed by different criteria in the loan application and approval processes.