In mortgage terminology, what is a point?

In mortgage terminology, a point refers to a fee that is paid upfront to the lender in order to reduce the interest rate on the loan. This is often called a "discount point." When a borrower pays points, they are essentially prepaying a portion of the interest in exchange for a lower rate over the life of the mortgage. Generally, one point is equal to 1% of the loan amount, and paying one or more points can lead to significant savings on interest payments throughout the duration of the loan.

This concept is crucial for borrowers to understand because it highlights the relationship between upfront costs and long-term savings. By paying points, borrowers can see their monthly payments decrease, making it an essential consideration when deciding on the structure of a mortgage.