What does the term "point" refer to in mortgage lending?

In mortgage lending, the term "point" specifically refers to a fee that is equivalent to 1% of the total loan amount. These points are typically charged at closing and can be associated with various aspects of a mortgage. Borrowers may choose to pay points to lower their interest rates; this is known as "buying down" the rate. Essentially, this upfront cost can lead to reduced monthly payments over the life of the loan, making it a valuable option for buyers looking to manage their long-term financial obligations.

Understanding this concept is crucial for borrowers when considering the overall costs of a mortgage, as it allows them to make informed decisions about whether to pay points based on their budget and how long they plan to stay in the home. Other choices, while related to real estate financing, do not correctly define what a point refers to within the context of mortgage lending.