What are points in mortgage lending?

Points in mortgage lending refer to the fees that borrowers can pay upfront in order to reduce the interest rate on their mortgage. Specifically, each point typically equals one percent of the loan amount. When a borrower pays points, they essentially prepay interest, which allows them to secure a lower ongoing interest rate over the life of the loan. This can significantly decrease the overall cost of the loan, especially if the borrower plans to stay in the property for an extended period.

The strategy of paying points can be beneficial for those looking to lower their monthly payments or save on total interest over the loan term. By understanding how points work, borrowers can make informed decisions about whether to pay them based on their financial situation and future plans.