In the context of a mortgage, what does "points" refer to?

"Points" in the context of a mortgage are associated with options that allow borrowers to obtain a lower interest rate by paying upfront fees. Specifically, when borrowers choose to pay points, they are essentially making an investment in their loan to reduce the interest rate, making their monthly payments more manageable over the life of the loan. Each point typically equals 1% of the loan amount and can lead to significant savings in interest costs over time.

When borrowers pay points at closing, they are purchasing a lower interest rate, which can be beneficial if they plan to stay in the home for an extended period. This strategy is often used as a means of mortgage interest rate reduction, and it plays a critical role in how mortgage financing is structured.

Understanding points is essential for borrowers evaluating loan options, as it influences both their initial closing costs and long-term financial commitments.