Points are just a bank's way of confusing you, like other businesses sometimes attempt. One example which comes to mind are mattresses. To prevent you from shopping from store to store, or online, for the best price for a mattress, each store has a different name or number for the exact same product found in a competitor's store. In Store A, the Seally Dreamsicle may be Store B's Seally Pleasuremate.
The banks do a similar thing. In order to attract you to "better" rates, they will advertise a lower rate, let's say 5% when the norm is 6%, but they may charge you 1 point. Most consumers are left in the dark with a random guess as to which bank has the best deal.
A loan of 5% with 1 point, is essentially an effective rate of 5.125. One point is equivalent to 1/8 (or .125) of a percent on your loan. The point is equivalent to one percent paid to the bank at the beginning of the loan. So basically, on a $100,000 loan, using the above numbers, of a 5% rate with 1 point, you are actually borrowing $99,000 ($100,000 loan - 1 point (or 1%, which equals $1,000 in this case)).
Hopefully, this will not be too overwhelming to comprehend. Focus on the
bold typeface to calculate what the bank is really quoting you. Banks may also add other misc fees or admin fees, etc, so be sure to ask about all possible charges. Also find out about all potential penalties, such as penalty for early repayment or semi-monthly payments.
