What are fees paid directly to the lender at closing in exchange for a reduced interest rate called?

The fees paid directly to the lender at closing in exchange for a reduced interest rate are known as mortgage points. When a borrower opts to pay these points upfront, they are effectively buying down the interest rate on their mortgage. Each point typically represents 1% of the loan amount and purchasing points can result in a lower monthly mortgage payment over the life of the loan, thus potentially saving the borrower money in the long term.

This concept is particularly important for borrowers who plan to stay in their homes for an extended period, as the upfront cost can be offset by the savings generated from the lower interest rate. On the other hand, the other terms listed do not specifically relate to this practice. Application fees refer to initial charges associated with processing the loan application, closing costs encompass a broader range of expenses involved in finalizing the property transaction, and processing fees relate to administrative aspects of handling the loan, none of which involve the direct exchange for a reduced interest rate like mortgage points do.