Referring back to my previous posting about how banks make money, often times banks sell your loans in the secondary market as soon as it closes in order to make a profit. It works very similar to bonds, you sell it either at a discount or at a premium depending on the current market rate. For example, if the average market interest rate is at 4.5%, and the interest rate on your home loan is at 4.75%, that means your loan has a higher interest rate than average rate in the market. Banks get to sell your loans at a premium. In the contrary, if the interest rate on your loan is at 4.375%, investors will ONLY purchase this loan from banks at a discount. In order for banks to make up for losses, they charge you points to make up the difference.
In the past, loan officers earned huge commission checks if they charged you a lot in points. The government realized that it was an issue in the banking industry. Therefore, they recently changed the law so that loan officers will no longer be compensated by how much points you pay in order to protect consumers. Good news huh? 🙂