What are Discount Points?

Discount points are a form of prepaid interest that borrowers can choose to pay at closing in order to reduce the interest rate on their loan. By purchasing discount points, which typically cost 1% of the total loan amount per point, borrowers can lower their monthly mortgage payments, making their overall loan more affordable over time.

When a borrower opts for discount points, they are essentially paying upfront costs to secure a lower interest rate for the duration of the loan. This is particularly beneficial for those who plan to stay in their home for an extended period, as the savings from reduced monthly payments can outweigh the initial cost of the points.

Other options, such as fees paid to process a loan application or costs associated with late payments, do not directly relate to the concept of discount points. Additionally, expenses for private mortgage insurance (PMI) are separate fees that protect lenders in case of borrower default, rather than being a mechanism for lowering interest rates. Thus, understanding discount points is crucial for borrowers who want to manage their mortgage expenses effectively over time.