How do points affect a mortgage loan?

Points, often referred to as discount points, are prepaid interest on a mortgage loan. When a borrower decides to pay points upfront, they essentially make an additional payment to lower the overall interest rate on the mortgage. Each point typically costs 1% of the loan amount and reduces the interest rate, which can lead to significant savings over the life of the loan. By paying points upfront, borrowers can decrease their monthly mortgage payment, making homeownership more affordable in the long run. This option is particularly attractive for those who plan to stay in their home for an extended period, as the savings from a lower interest rate can outweigh the initial cost of the points.

The other choices do not accurately describe the function of points in a mortgage context. Points do not increase the total loan amount; they are a one-time fee used to lower the interest rate. They are not related to late payments and aren't mandatory costs for all applicants; they are entirely optional depending on the borrower’s financial strategy and preferences.