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

In mortgage lending, "points" refer to specific fees that borrowers can pay to lower their mortgage interest rate. One point is defined as one percent of the total loan amount. This means that if a borrower is taking out a mortgage of $200,000, paying one point would cost them $2,000.

This practice is beneficial for borrowers who want to secure a lower interest rate on their loans, as lower rates can lead to reduced monthly payments and less overall interest paid over the life of the loan. The payment of points is seen as a way to buy down the interest rate; the more points one pays upfront, the lower their percentage rate might be, resulting in significant long-term savings.

The other options do not accurately describe what points are in the context of mortgage lending and can lead to confusion. Points are not tied to timely mortgage payments, nor are they incentives specifically for first-time homebuyers or rewards for lenders based on sales success. Therefore, understanding that points are primarily transaction fees related specifically to interest rates is essential for anyone studying the mortgage lending process.