What are discount points in the context of real estate loans?

Discount points are fees paid to the lender at closing in exchange for a reduced interest rate on a mortgage. Each point typically represents 1% of the loan amount and serves as an upfront payment to lower the periodic interest payments over the term of the loan. Borrowers often choose to pay discount points when they plan to stay in their home for a longer period, as the lower monthly payments can lead to substantial savings over time, making the upfront cost worthwhile.

This practice allows borrowers to essentially "buy down" their interest rate, which can significantly affect the total cost of the loan and the monthly payment amount. While others mentioned in the options may pertain to real estate financing—such as closing costs or insurance—they do not directly relate to the mechanism of discount points reducing the interest rate over the loan's life.