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What are Points and Why do Some Mortgage Options Require Them?

Points are used to buy down the interest rate on a mortgage. One point is usually one percent to the purchase price. These are often termed "discount points." Generally, the lower the rate the more points you have to pay. Loans differ in the interest rate and points charged.

Points can be paid on a mortgage up front at closing to buy down the interest rate, however, if you don't have enough cash available for closing, this may not be an option. Less points means less money up front for closing.

A word of caution -- some lenders advertise very low interest rates, though on further examination you may discover that this is contingent on you paying one, two or three points upfront at closing. Remember, one point can be up to 1 percent of the loan amount.

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