In relation to mortgages, what does the term 'points' typically refer to?

The term 'points' in the context of mortgages specifically refers to prepaid interest that borrowers pay upfront to secure a lower interest rate on their loan. By purchasing points, which are usually expressed as a percentage of the total loan amount, borrowers can effectively reduce their monthly mortgage payments over the life of the loan. This strategy is often employed by homeowners who plan to stay in their homes for a longer period, as the upfront cost can lead to significant savings on interest over time.

In contrast, the other choices do not accurately describe 'points'. Discounts on the purchase price focus on reducing the initial cost of the home itself rather than the financing terms. Fees charged by real estate agents pertain to the commissions paid for their services, and therefore they are unrelated to mortgage interest. Lastly, while the interest applied to the loan is a relevant concept, it does not capture the specific meaning of 'points' within mortgage terminology.