How is the interest rate affected by points paid upfront?

When points are paid upfront on a mortgage, they effectively lower the interest rate over the life of the loan. This occurs because points represent prepaid interest. By paying points, a borrower is agreeing to pay a certain percentage of the loan amount upfront, which often translates into a lower interest rate. This can result in significant cost savings over the duration of the mortgage, as a lower rate reduces the amount of interest paid each month.

In this context, paying points can be seen as an investment in reducing long-term borrowing costs, appealing particularly to those who plan to stay in their homes for an extended period. Therefore, the choice that states paying points typically lowers the interest rate over the life of the loan accurately reflects this relationship.

Other options do not adequately capture the primary effect of points on interest rates. For example, while it's true that paying points might affect the closing costs, this does not encompass the crucial benefit of lower monthly payments associated with a reduced interest rate. Similarly, paying points does not decrease the loan amount or increase the monthly payment outright; instead, it serves to modify how interest accumulates over time.