What do discount points refer to in the mortgage industry?

Discount points in the mortgage industry refer to a type of additional fee that a borrower pays at closing to reduce the interest rate on their mortgage. Each point typically equals one percent of the loan amount and can effectively lower the monthly payment over the life of the loan. By paying these points upfront, borrowers can save money over time through reduced interest expenses, making it a strategic financial choice for many.

This concept is essential for understanding how financing works in real estate. It illustrates the relationship between upfront costs and long-term savings. Borrowers that anticipate staying in their home for a longer duration might find that paying these points is beneficial because the savings on interest can outweigh the initial payment made.

In contrast, the other options do not accurately represent discount points. Initial payments typically refer to the first payment made towards a mortgage. Prepayments relate to paying off a portion or the entirety of the loan before it's due, which is unrelated to the concept of discount points. Closing costs encompass various fees charged at the closing of a real estate transaction but do not specifically denote the points that lower interest rates.