What is the definition of a 'point' in mortgage terms?

In mortgage terminology, a 'point' refers to a fee equal to 1% of the mortgage loan amount. When a borrower pays points, it is generally part of the transaction cost that can also serve to lower the interest rate on the loan. For example, on a $200,000 mortgage, one point would equate to $2,000. This practice is often referred to as "buying down" the interest rate, where upfront costs are exchanged for reduced monthly payments over the life of the loan.

This definition distinguishes points from other terms related to mortgages. An interest rate increase refers to a change in the rate at which interest is charged on a mortgage, which does not directly correlate with the concept of a point. A cash reserve requirement pertains to the sum of money a borrower must have available to qualify for a loan, which is not associated with points. Lastly, while points can be considered a closing cost fee since they are payable at closing, they are only one specific type of closing cost, making it essential to understand that a point's definition centers on its percentage of the loan amount.