What type of points do lenders use to reduce interest rates on loans?

Lenders use discount points to reduce interest rates on loans, making this the correct choice. Discount points are essentially upfront fees paid at closing that allow borrowers to "buy down" the interest rate on their mortgage. Each point typically equals 1% of the loan amount and results in a reduced interest rate for the life of the loan. Effectively, this means that by paying points upfront, borrowers can lower their monthly mortgage payments, which can lead to significant savings over time.

In contrast, origination points are fees charged by lenders for processing a loan application. Adjustment points are not a standard term commonly used in mortgage financing, and service points typically refer to fees for additional services offered by lenders, but they do not impact the interest rate in the same way discount points do. Thus, understanding the specific function of discount points is key for borrowers looking to manage their mortgage costs effectively.