What does the term "points" refer to in mortgage financing?

In mortgage financing, the term "points" specifically refers to fees that are paid upfront to reduce the interest rate on the loan. Each point represents 1% of the total loan amount, allowing borrowers to lower their monthly mortgage payments by paying these fees at closing. This practice is often referred to as "buying down the rate."

When borrowers choose to pay points, they can secure a lower interest rate for the duration of the mortgage, which can result in significant savings over time. This financial strategy is commonly utilized by individuals who intend to stay in their home for a longer period, as the upfront cost can be recouped through reduced monthly payments.

The other concepts mentioned do not relate to the use of points in mortgage financing. Points earned for on-time payments, extra fees for loan processing, and investment points for equity loans are not standard terminologies associated with the mortgage point system. Thus, the definition provided as the correct answer aligns accurately with established practices in the mortgage industry.