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.
What Is Discount Points?
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.
Discount Points in Practice
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.
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.
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