What do points refer to in the context of home buying?

In the context of home buying, points refer to fees that borrowers can pay upfront at the time of closing to reduce the interest rate on their mortgage, effectively lowering the overall cost of the loan over its lifespan. Each point typically equals one percent of the loan amount and can result in a lower annual percentage rate (APR), which can make monthly payments more manageable and reduce the total interest paid over the life of the loan. This practice of buying down the interest rate can be a strategic financial decision for homebuyers who plan to stay in their home for a longer period, as the initial cost of points can yield significant savings on interest payments over time.

Understanding points is crucial for homebuyers as it illustrates the relationship between upfront costs and long-term savings in mortgage financing.