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

The term "points" in mortgage lending specifically refers to upfront fees that a borrower pays to the lender in exchange for a lower interest rate on their mortgage. This is often called "buying down the rate." By paying points, which are typically calculated as a percentage of the loan amount (one point equals one percent of the loan), borrowers can reduce their monthly mortgage payments and potentially save thousands of dollars in interest over the life of the loan.

This approach allows borrowers to tailor their loan terms according to their financial strategies; those who plan to stay in their home for a longer period may find it beneficial to pay points to secure a lower interest rate. In contrast, borrowers who anticipate moving or refinancing in a short time might prefer a no-point option, leading to higher monthly payments but lower upfront costs.

The other options refer to different aspects of mortgage lending, such as documentation requirements and approval timeframes, but they do not relate to the concept of "points," which is specifically concerned with interest rates and upfront costs associated with lowering the overall cost of borrowing.