What are "points" in real estate financing?

In real estate financing, "points" refer to upfront fees that a borrower pays to the lender at closing in exchange for a reduced interest rate on a mortgage. Each point is typically equal to one percent of the loan amount, and this payment can lower the monthly mortgage payments over the life of the loan. Borrowers often choose to pay points when they plan to stay in the home long enough to benefit from the reduced interest costs, as this can lead to significant savings over time. Reducing the interest rate through points is a strategic decision that can be advantageous depending on the borrower's financial situation and future plans.

The other options pertain to unrelated concepts in real estate financing. For instance, discounts on closing costs do not involve points in the context of interest rates; rather, they refer to negotiating reduced fees associated with the closing process. Taxes owed on the property are a separate financial obligation that homeowners must manage independently of their mortgage financing. Lastly, types of insurance related to mortgages, such as mortgage insurance, serve a different purpose in the transaction and are not categorized under points.