There is an inverse relationship between points and interest rate on your loan. The higher the points you pay, the lower the interest rate, and vise versa.

There are fees other than points associated with a loan transaction, but for a given loan amount and service provider, these other fees are fundamentally fixed. Other fees may include appraisal, credit report, lender's inspection, tax service, processing, underwriting, wire transfer, flood certification, title and escrow fees, notary fees, recording fees, etc. For example, consider a $100,000, 30-year, fixed rate loan on a home valued at $200,000. No matter what the points and interest rate you pay, an independent appraiser won't give you a "zero-fee appraisal", nor will a title company give you rebate pricing for a policy of title insurance.

Because of the inverse relationship between points and interest rate, you can obtain a rebate from the lender to cover some or all of your points and other fees. By increasing the interest rate on your loan, the lender might pay some or all loan fees. By reducing the interest rate on your loan, you'll pay some or all of the loan fees.

As a borrower, you should answer these questions before you commit to a new loan: Should I obtain a lower interest rate, pay points, loan fees, or both? Should I get a higher interest rate and reduce out-of-pocket fees? To answer these questions, estimate how long it will be until you plan to sell or refinance. The task then becomes finding the interest rate / fee combination which is the least expensive during this window of time.

Here is a hypothetical example. For simplicity, "other fees" are fixed at $1,000. You own your home and are interested in refinancing your high-interest loan to take advantage of a new, low-interest loan. The interest rates for zero point / zero fee loans are well below your current rate, so you know it's time to refinance. Your employer has indicated you might be transferred in approximately three years. You compare three rate / fee combinations to identify which is the least costly over the next three years. You're considering a 30-year, fixed loan.