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

In mortgage lending, "points" refers specifically to fees paid to the lender at closing, which are typically used to buy down the interest rate on the loan. Each point generally represents 1% of the loan amount, and paying points allows borrowers to secure a lower interest rate, ultimately reducing their monthly payments over the life of the loan. This option is particularly strategic for borrowers who plan on staying in their home for an extended period, as the upfront investment can lead to significant savings in interest payments over time.

The other options do not accurately capture the definition of points in the context of mortgage lending. Interest rates do vary based on credit scores, which influences the terms a borrower might receive but does not relate to points. Tax deductions are available to homeowners but are distinct from the concept of points. Property values may increase over time, making this another separate concept within real estate that does not pertain to the definition of points in mortgage transactions.