What are "points" in mortgage lending?

In mortgage lending, "points" specifically refer to the fees borrowers can choose to pay upfront at closing in order to obtain a lower interest rate on their loan. This practice is often referred to as "buying down the rate." By paying points, which are typically calculated as a percentage of the total loan amount, the borrower effectively reduces the interest they will pay over the life of the mortgage. For example, one point often equals one percent of the loan amount.

This option is rooted in mortgage financing strategy, as paying points can result in significant long-term savings, especially for borrowers who plan to stay in their home for several years. By reducing the interest rate through the payment of points, the overall cost of borrowing decreases, leading to lower monthly mortgage payments.

Other choices relate to different aspects of the lending process. Fees for processing the loan, while part of closing costs, do not specifically refer to points. Costs for property inspections are standard in the home-buying process but are unrelated to the concept of points for interest rate reduction. As for refunds for early repayment, these do not correlate with the notion of points and do not apply in the same context of mortgage lending.