In mortgage lending, what are "points"?

Prepare for the CFPB Mortgage Compliance Training Test. Study with flashcards and detailed questions and explanations. Master your knowledge and excel in your exam!

In mortgage lending, "points" refer to fees paid to lenders that are calculated as a percentage of the loan amount, typically to secure a lower interest rate on the mortgage. This practice is known as "buying down the rate." When a borrower pays points upfront, it can result in a lower monthly payment because the lender is receiving an immediate fee in exchange for a reduced interest rate over the life of the loan. For example, one point usually equals one percent of the loan amount. This can be an attractive option for borrowers who plan to stay in their home long enough to recoup the cost of the points through the savings in interest payments.

The other choices do not accurately describe what points refer to in the context of mortgage lending. Points are not related to payment history or the duration of a mortgage, nor are they associated with fees charged by real estate agents. Understanding the role of points in mortgage transactions is crucial for borrowers to make informed decisions about their financing options.

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