In mortgage financing, what does "points" refer to?

In mortgage financing, "points" specifically refers to a percentage of the loan amount that borrowers pay upfront, which is typically considered prepaid interest. Each point is equal to 1% of the total loan amount. For example, if a borrower is taking out a $200,000 loan, one point would cost $2,000. The borrower may choose to pay points to secure a lower interest rate over the life of the loan, effectively reducing the monthly payments. This strategic financial decision can be beneficial for those planning to stay in their mortgage for a long duration, as it can lead to significant savings in interest over time.

Understanding points is crucial for loan originators and borrowers alike, as it directly impacts the overall cost of the mortgage and the financial strategy a borrower may employ.