Discount Points
Definition
Discount points are upfront fees paid to a lender at closing to reduce (buy down) the interest rate on a mortgage loan. One point equals 1% of the loan amount and typically reduces the rate by approximately 0.25%.
Example
A borrower takes a $300,000 loan. Paying 2 discount points costs $6,000 (2% x $300,000) upfront and reduces the rate from 7% to 6.5%. This saves approximately $100/month. The breakeven point is 60 months ($6,000 / $100/month). If the borrower stays beyond 5 years, the points are worthwhile.
Exam Tip
One point = 1% of loan amount (NOT purchase price). Points reduce the interest rate. Know the difference between discount points (reduce rate) and origination points (lender's fee for processing). The exam may ask you to calculate the cost of points or determine the breakeven period.
Related Financing Terms
Deed (in foreclosure context)
In the context of foreclosure, a deed transfers ownership of the foreclosed property to the new owner, typically the buyer at a foreclosure sale.
Trustee Sale
A trustee sale is a type of foreclosure where a trustee, appointed under a deed of trust, sells the property at auction to satisfy the debt.
Foreclosure
Foreclosure is the legal process by which a lender takes possession of a property when a borrower fails to make mortgage payments. It allows the lender to sell the property to recover the outstanding debt.
Conventional Loan
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
FHA Loan
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
VA Loan
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
Frequently Asked Questions
Test Your Financing Knowledge
Practice with exam-style questions to make sure you can apply Discount Points and other financing concepts.