What are "points" in the context of mortgage lending?

In the context of mortgage lending, "points" refer to a type of fee that borrowers pay to the lender at closing, often referred to as "discount points." These fees are usually calculated as a percentage of the loan amount. Each point typically equals 1% of the total loan amount and can be paid to reduce the interest rate on the mortgage or to cover closing costs.

When borrowers choose to pay points up front, they may secure a lower interest rate over the life of the loan, which can lead to significant savings in interest payments over time. This strategy can be particularly beneficial for borrowers who plan to stay in their homes for an extended period. Understanding how points function helps borrowers make informed financial decisions regarding their mortgages and can ultimately affect their overall loan costs.

This concept contrasts with the other options presented, which pertain to different aspects of mortgage lending. Late payment fees relate to penalties incurred when payments are missed, interest payments refer to the regular payments made each month as part of the mortgage obligation, and discounts for early repayment involve reducing the total owed on the loan if paid off ahead of schedule. Each of these functions differently and does not have the same impact as points at the closing stage of a mortgage loan.