What does the term "points" refer to in mortgage financing?

In mortgage financing, the term "points" specifically refers to fees paid to the lender at closing to either reduce the interest rate on the loan or as a part of the origination fees. When a borrower pays points, they are effectively pre-paying some of the interest on the loan, which can lower the overall interest rate for the life of the mortgage. Each point is typically equivalent to one percent of the loan amount.

Paying points can be beneficial for borrowers who plan to stay in their homes for an extended period, as the lower interest rate may result in significant savings over time. This distinguishes points from other terms related to mortgage transactions, such as discounts on mortgage insurance premiums, which involve different costs and obligations. Understanding points is crucial for borrowers to make informed financial decisions about how to structure their mortgage loans and to assess the overall cost of borrowing compared to their long-term plans.