What does the term "2 points" refer to in real estate financing?

The term "2 points" in real estate financing refers to a method of expressing the cost of a loan as a percentage of the total loan amount. In this context, "points" are typically associated with loan origination fees, where each point equals one percent of the loan amount. Therefore, if a borrower is charged 2 points on a $100,000 loan, they would need to pay $2,000 upfront as part of the loan costs.

This concept is crucial for understanding how much it costs to obtain a mortgage, as these points can be seen as prepaid interest, lowering the borrower’s monthly payment or overall interest rate in some cases. Understanding points can help borrowers make informed decisions regarding the total cost of their financing options, particularly when comparing different loan products.