According to the rule of thumb, how does each point charged by the lender affect the interest rate?

The rule of thumb regarding points charged by a lender refers specifically to how these points influence the overall interest rate of a loan. When a borrower pays points upfront, these points are essentially prepaid interest, which can lower the interest rate on the loan.

In this situation, each point is generally understood to decrease the interest rate by a small, standard increment. The choice indicating that the rate decreases by 1/8% for each point is based on common lending practices where paid points can effectively decrease the cost of borrowing over the life of the loan.

Understanding this mechanism is crucial for mortgage calculations, as it allows potential borrowers to evaluate whether paying points to reduce their interest rate is beneficial based on how long they plan to stay in the home and other financial considerations.