Money the borrower can choose to pay a mortgage lender to get a lower interest rate. Each point is equal to one percent of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000).
Discount points are paid for with money the borrower chooses to pay a mortgage lender to get a lower interest rate. Each point is equal to one percent of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000).
Discount points allow borrowers to “buy down” their mortgage rate. Discount points may also be referred to as “prepaid interest” because the borrower is paying upfront to have a lower interest rate and payment for the duration of the loan.
For example, a $100,000 30-year mortgage at a 4.25 percent interest rate might cost $2,000 in loan fees. By paying an additional two discount points at a cost of $2,000, the borrower might get a 4.00 percent interest rate.
Is it worth the extra payment? The first loan has a monthly principal and interest payment of $491.94. The second loan’s payment at $477.42 is $15.52 less. The extra $2,000 in discount points divided by the $14.52 monthly savings is 138 months. That means it would take about 11.5 years to recoup the additional costs with monthly savings.
Most loans come with rate/point options. But it only makes sense to pay discount points when the borrower knows that he or she will keep the property and its mortgage long enough to recoup the additional costs.