Discount Points
Definition and meaning of Discount Points in real estate.
Discount points are upfront fees paid directly to a lender at closing in exchange for a reduced mortgage interest rate. This practice, often referred to as buying down the rate, lowers the borrower's ongoing monthly payments over the life of the loan.
In more detail
One discount point typically costs one percent of the total loan amount. For example, on a loan of a certain size, one point would equal a specific proportion of that value. Buyers must calculate their break-even point to decide if paying this upfront cost makes financial sense.
If a homeowner plans to sell the property or refinance the mortgage within a few years, they may not recoup the initial expense of purchasing points.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Cost | One percent of the mortgage loan amount |
| Who pays | The homebuyer or borrower at closing |
| Primary benefit | Lower monthly interest payments |
A homebuyer taking out a mortgage chooses to pay one discount point at closing to lower their interest rate by a quarter of a percentage point. This decision reduces their monthly mortgage payment, and they will recover the cost of the point after living in the home for several years.
Frequently asked questions
Are discount points tax-deductible?
In many cases, discount points paid on a primary home purchase are tax-deductible, but tax rules are complex. Homeowners should consult a qualified tax professional regarding their specific financial situation.
What is the difference between discount points and origination points?
Discount points are paid to buy down the interest rate, whereas origination points are administrative fees charged by the lender to cover the costs of processing and evaluating the loan application.