What do "points" refer to in mortgage lending?

In mortgage lending, "points" refer specifically to fees that borrowers pay to lower their interest rate, and are commonly expressed as a percentage of the total loan amount. Each point typically represents 1% of the loan amount and, by paying these points upfront, borrowers can achieve a lower interest rate over the life of the mortgage. This practice can be advantageous for those who plan to stay in their home for a long period, as it can lead to substantial savings on interest payments over time.

The concept of points is central to understanding how mortgage pricing works and can be a strategic decision for borrowers balancing upfront costs with long-term savings. For instance, if a borrower takes out a $200,000 mortgage and pays two points, they would pay $4,000 to lower their interest rate, potentially resulting in lower monthly payments.

Other responses do not accurately represent the financial concept of points in mortgage lending, and thus they do not capture the essence of how points function in relation to loan costs and interest rates.