What does the term "points" refer to in mortgage lending?

The term "points" in mortgage lending specifically refers to fees paid to the lender to lower the interest rate on a mortgage loan. Each point typically represents 1% of the loan amount and is used to buy down the mortgage rate, which can result in lower monthly payments for the borrower over the life of the loan. This is a common practice for borrowers looking to reduce their overall interest costs, as paying points up front can lead to significant savings in the long term.

The concept of points in this context is integral to understanding how borrowers can customize their mortgage terms based on their financial preferences and goals. By paying points, a borrower essentially makes an upfront investment to achieve better long-term financing conditions, which can be particularly valuable if they intend to stay in the home for several years.