Finance & Mortgages

Discount Points

Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.

Full Definition

Discount points (often just called 'points') are an upfront fee paid to a lender at closing in exchange for a reduced interest rate on the mortgage. Each point equals 1% of the loan amount. Paying points is sometimes called 'buying down the rate.' The general rule of thumb is that each point reduces the interest rate by approximately 0.25%, though the actual reduction varies by lender and market conditions. Points may be tax-deductible as prepaid interest. The decision to pay points depends on the borrower's break-even timeline — how long they must keep the loan for the monthly savings to outweigh the upfront cost. Origination points are fees for loan processing and do not reduce the rate.

Real-World Example

A borrower takes a $400,000 loan. Paying 2 discount points ($8,000) reduces the rate from 7.0% to 6.5%. Monthly savings: ~$130. Break-even: $8,000 ÷ $130 ≈ 62 months.

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How Discount Points Appears on the Real Estate Exam

Common question types, tested concepts, and what to watch out for

1 point = 1% of the loan amount. Distinguish discount points (reduce rate) from origination points (processing fee). Break-even analysis is a common exam calculation.