What do points represent in mortgage financing?

Points in mortgage financing are specifically fees paid to the lender at closing that serve to reduce the interest rate on the loan. When a borrower opts to pay points, they are essentially prepaying a portion of the interest upfront, which is commonly referred to as "buying down the rate." Each point typically equals 1% of the total loan amount. This arrangement can be beneficial for borrowers seeking lower monthly payments over the life of the loan or planning to stay in the property for an extended period, as it can result in significant savings over time.

Understanding this concept is vital in real estate finance, as it enables borrowers to make informed choices about their mortgage options and understand the financial implications of paying points versus accepting a higher interest rate without such fees.