What is a point in mortgage lending?

In mortgage lending, a point typically refers to a fee that is equal to 1% of the mortgage amount. This fee is often utilized by borrowers to buy down the interest rate on their loan. By paying points upfront at closing, a borrower can lower their monthly mortgage payments, ultimately saving money over the life of the loan.

This mechanism is often viewed as a strategic financial decision; borrowers need to evaluate whether it makes sense for them based on how long they plan to stay in the home and their ability to pay the upfront cost. The lower interest rate achieved by paying points can result in significant savings in interest payments over time.

The other options do not accurately describe what a point is in the context of mortgage lending. While points are specifically associated with reducing interest rates, other fees and penalties mentioned in the incorrect options do not align with the standard definition of points.