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
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.
Fixed-Rate Mortgage
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
Loan-to-Value Ratio (LTV)
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
Frequently Asked Questions
Test Your Financing Knowledge
Practice with exam-style questions to make sure you can apply Discount Points and other financing concepts.