Discount Points
What Are Discount Points?
Discount points are upfront fees paid to a lender to reduce the interest rate on a loan.
One discount point typically equals 1 percent of the loan amount.
For example, on a $300,000 mortgage, one point would cost $3,000.
Paying points lowers the long-term interest rate and monthly payment.
Why It Matters
Discount points:
- Reduce total interest paid over time
- Increase upfront closing costs
- May improve affordability for long-term homeowners
Whether points make financial sense depends on how long the borrower plans to keep the loan.
How Discount Points Work
Discount points reduce the interest rate in exchange for prepaid interest at closing.
The borrower calculates a break-even point, which is the time required for monthly savings to exceed the upfront cost.
Staying in the home beyond the break-even period may result in overall savings.
Discount Points vs. Origination Points
Discount Points → Reduce interest rate
Origination Points → Cover lender fees
Both increase upfront costs but serve different purposes.
FAQs About Discount Points
Are discount points tax-deductible?
In some cases for primary residences, but tax rules vary.
Do all loans allow discount points?
Most mortgage loans allow them, but structures differ.
Can points be financed into the loan?
Sometimes, though this increases the total loan balance.
Related Terms
