📘 What are Discount Points?

Discount points are upfront fees paid by a borrower to a lender in exchange for a reduced interest rate on a mortgage. One discount point typically equals 1% of the total loan amount and can lower the interest rate by about 0.25%, depending on the lender.

This process is known as “buying down the rate” and can lead to significant interest savings over the life of the loan.

📌 When and Why It’s Used

Discount points are most often used by borrowers who plan to hold onto a property or mortgage for a long time. Paying points can reduce monthly payments and total interest costs, making it attractive for long-term investors.

It’s a strategic trade-off between upfront cost and future savings, and is especially useful in high-interest environments.

🧮 How It’s Calculated or Applied

To calculate discount points, multiply the number of points by 1% of the loan amount. Then, calculate how much each point reduces the interest rate and how long it will take to “break even” based on your monthly savings.

This helps determine if paying points upfront is worth the long-term savings.

✅ Pros

• Lowers your interest rate and monthly mortgage payments
• Can lead to significant long-term savings on interest
• May be tax-deductible in some cases (consult a tax advisor)

⚠️ Cons

• Requires higher upfront closing costs
• Break-even period may be too long if you plan to sell or refinance
• Not ideal for short-term property holds or flips