Discount Points
Discount points are optional fees paid upfront to a lender to reduce the interest rate on a mortgage loan. Each point typically costs 1% of the total loan amount and generally reduces the interest rate by 0.25%.
Example
“Sarah decided to pay two discount points at closing to lower her mortgage rate from 6.5% to 6.1% over the life of her 30-year loan.”
Memory Tip
Think 'pay points now, discount later' - you're buying down your rate by paying percentage points upfront.
Why It Matters
Buying points can significantly lower monthly mortgage payments and total interest paid over the life of the loan, making it especially valuable for borrowers who plan to stay in their home long-term.
Common Misconception
Many borrowers think discount points are mandatory fees when they're actually optional purchases that may or may not make financial sense depending on how long you keep the loan.
In Practice
On a $400,000 loan, purchasing 2 discount points would cost $8,000 upfront but could reduce the interest rate from 6.5% to 6.0%, saving hundreds of dollars monthly in payments.
Etymology
The term 'points' comes from the percentage symbol (%), where each point equals one percent of the loan amount, creating a mathematical 'discount' on future interest payments.
Common Misspellings
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