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And if that is possible how does this prevent the bank from avoiding paying imputed interest. Additionally could points be purchased to bring a rate to zero or a negative number?

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  • Numerically, sure. Whether any bank would do it, gods only know. And you may be able to do better by investing the money rather than buying points with it
    – keshlam
    Commented Nov 10, 2023 at 3:10

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Buying points is essentially prepaying the rate. You can only prepay as much as the bank is willing to let you, usually not a lot compared to the full-priced rate. So while theoretically both things are possible (no laws forbidding, that is, AFAIK), in practice it is unlikely that any bank would allow them.

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  • But isn’t the prepayment of interest only valid for the first couple of years after which the bank would be gaining imputed interest due to a below market rate?
    – CodeCamper
    Commented Nov 10, 2023 at 1:28
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    @CodeCamper banks calculate the points based on certain assumptions, yes. You do not have an option to prepay as much as you want for as long as you want, even regular payments you can usually prepay for no more than 1-2 months ahead.
    – littleadv
    Commented Nov 10, 2023 at 1:32
  • But I’m talking about buying points to permanently reduce the interest rate below the AFR. Isn’t there a point where the bank is gaining imputed interest because you actually save more money buying the points in the long run.
    – CodeCamper
    Commented Nov 10, 2023 at 1:54
  • Not sure what good it would do anyone but the bank if there was such a point. They have standard points tradeoff options. They aren't likely to negotiate over that.
    – keshlam
    Commented Nov 10, 2023 at 1:58
  • @CodeCamper the accounting for points is not trivial, neither is the tradeoff calculation. The points represent the discount the bank needs to give to investors when selling the loan. Bank is not getting imputed anything. As an investor, would you buy a loan that pays less than afr, or with negative rate? You probably wouldn't.
    – littleadv
    Commented Nov 10, 2023 at 3:12

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