Discount Points

Discount points are extra money paid up front when getting a home loan in order to get a lower interest rate over time. In other words, you can pay more now to pay less every month later. The borrower pays extra money at the beginning to get a lower interest rate throughout the loan. This is helpful if the buyer plans to keep the loan for many years. The lender likes discount points because they get extra money up front, which increases how much they earn from the loan.Discount points are prepaid interest. They are based on the loan amount, not the home’s price. 1 point = 1% of the loan amount. Points are paid at closingExample 1Loan amount: $200,000 Discount points: 3 points 3 points = 3% $200,000 × 3% = $6,000 The borrower pays $6,000 upfront to get a lower interest rate. Even though the bank really gives out only $194,000 (because $6,000 was paid back right away), it still charges interest on the full $200,000.Example 2Home price: $350,000 Loan: 80% of the price Discount points: 2.5 pointsStep 1: Find the loan amount $350,000 × 80% = $280,000 Step 2: Calculate the points $280,000 × 2.5% = $7,000So the buyer pays $7,000 upfront in discount points.Remember that discount points are extra money paid upfront to get a lower interest rate on a home loan, which helps buyers who plan to keep the loan for a long time.