Discount Points


DEFINITION of 'Discount Points'

A type of prepaid interest mortgage borrowers can purchase that lowers the amount of interest they will have to pay on subsequent payments. Each discount point generally costs 1% of the total loan amount and depending on the borrower, each point lowers your interest rate by one-eighth to one one-quarter of your interest rate. Discount points are tax deductible only for the year in which they were paid.

BREAKING DOWN 'Discount Points'

For example, on a $200,000 loan, each point would cost $2,000. Assuming the interest rate on the mortgage is 5% and each point lowers the interest rate by 0.25%. Buying 2 points will cost $4,000 and will result in an interest rate of 4.50%.

Both lenders and borrowers gain benefits from discount points. Borrowers gain the benefit of lowered interest payments down the road, but the benefit applies only if the borrower plans on holding onto the mortgage long enough to save money from the decreased interest payments. Lenders benefit by receiving cash upfront instead of waiting for money in the form of interest payments over time, which enhances the lenders liquidity situation.

  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Origination Points

    A type of fee borrowers pay to lenders or loan officers in order ...
  3. Mortgagor

    An individual or company who borrows money to purchase a piece ...
  4. Prepaid Interest

    The interest that a debtor pays before the first scheduled debt ...
  5. Negative Points

    A cash rebate paid by lenders to a mortgage broker or the borrower ...
  6. Mortgagee

    An entity that lends money to a borrower for the purpose of purchasing ...
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