What are points in mortgage lending?

Points in mortgage lending refer to fees that borrowers pay upfront at the closing of the mortgage in order to secure a lower interest rate on their loan. Each point is equivalent to one percent of the loan amount, so if a borrower takes out a $200,000 mortgage and buys two points, they would pay $4,000 at closing to reduce the interest rate.

This practice offers a way for borrowers to decrease their monthly mortgage payments over the life of the loan. By paying points upfront, they effectively prepay some of the interest in exchange for a lower rate, which could result in significant savings over time, especially if they plan to stay in the home for many years.

The other options describe aspects of mortgage lending that do not directly relate to the concept of points. Fixed interest rate adjustments refer to the mechanism of adjusting a fixed rate, types of loan products describe the different options available but do not touch on points, and minimum down payments are conditions related to the initial payment required when securing a loan.