What is a "point" in mortgage terminology?

In mortgage terminology, a "point" refers to a fee equal to 1% of the mortgage amount. This fee can be used as a form of prepaid interest, allowing borrowers to lower their overall interest rate on the loan by paying more upfront. For instance, if a borrower takes out a $200,000 mortgage and decides to pay two points, they would pay $4,000 at closing. This practice is common in the mortgage industry as it offers flexibility for borrowers who want to adjust their payments over the life of the loan.

Understanding points is essential for borrowers, as it can significantly impact the total cost of the mortgage over time. It highlights the trade-off between upfront costs and long-term savings, making it a critical concept in the loan decision-making process.