Discount Points
Prepaid interest paid at closing to permanently lower the loan's interest rate.
One discount point equals 1% of the loan amount. On a $400,000 loan, one point costs $4,000 at closing and typically reduces the rate by somewhere between 0.125% and 0.375% depending on the lender's pricing grid and current market conditions.
Paying points is a present-value bet: you pay cash today to save monthly payments tomorrow. The break-even is the number of months until the lower payment recovers the upfront cost. If you'll keep the loan well past that point, points pay off; if you might sell or refinance sooner, they probably don't.
Borrowers with strong long-term holding plans and tight cash flow often benefit most from buying down the rate. Borrowers who expect to move or refinance generally do better directing that cash toward closing costs or the down payment.
Related terms
Other terms you'll see alongside Discount Points
The percentage of the loan balance the lender charges as the cost of borrowing, paid annually but accrued daily.
A blended figure that combines the note rate with most upfront loan costs to express the true yearly cost of borrowing.
Money the lender contributes toward your closing costs in exchange for accepting a slightly higher interest rate.
A lender's commitment to honor a specified interest rate for a defined period, regardless of market movement.
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