What are discounts or "points" on mortgages considered?

Discounts or "points" on mortgages are primarily considered a charge by the lender to increase the yield on investments. When a borrower pays points at closing, they are essentially prepaying a portion of the interest on the loan. Each point typically represents 1% of the loan amount and allows borrowers to reduce the interest rate on their mortgage, which can lead to lower monthly payments over the life of the loan.

This practice benefits lenders because it enhances their return on investment. The upfront payment of points means that even if the borrower pays off or refinances the loan before its full term, the lender has already secured a higher yield through the initial upfront payment. This makes points an important consideration for both borrowers looking to manage their long-term costs and lenders aiming to optimize their investment returns.

The other answer choices do not accurately reflect the nature of points. The charge solely for processing the mortgage does not capture the purpose of points, which are more about adjusting the interest rate than just processing fees. A fee to reduce the principal amount misrepresents points, which do not lower the borrowed amount but rather affect interest rates. Finally, describing points as a tax on mortgage transactions is incorrect, as they are not government-imposed taxes but rather fees negotiated between lenders