What are "points" in relation to mortgage loans?

"Points" refer to fees that are paid directly to the lender at closing in exchange for a reduced interest rate on a mortgage loan. This transaction allows borrowers to "buy down" their interest rate, which can result in lower monthly mortgage payments over the life of the loan. Typically, one point is equivalent to 1% of the total loan amount, and paying points can be a strategic decision for borrowers who intend to stay in their homes long enough to recoup the upfront costs through the savings from reduced interest payments.

Understanding the nature of points is important because they can affect a borrower’s overall cost of the loan and their long-term financial planning. Borrowers should carefully consider whether to pay points based on how long they plan to stay in their home and their financial situation.