QandAs: Loans

What are Discount Points?

Answer:
Some mortgage lenders give you the option of discounting

your interested rate by paying a fee at closing. This fee is a percentage of the loan the amount, generally from 1% to 3% and known as Discount Points. For each discount point you purchase, your interest rate will be reduced by about 0.125%.

Let’s say a bank offers to lend you $100,000 at 7% interest. If you buy 2 points ($2,000), your interested rate will be discounted to 6.75%. Buying discount points will also reduce the amount of your monthly payment. When deciding whether to buy discount points, always consider how long you plan on being in the loan. It may take several years for the savings from the rate discount to exceed the points paid at closing.