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Discount point
A fee added to your closing costs in exchange for a lower interest rate on a loan The basic idea of discount points is to pay up-front in order to save over the life of the loan. One discount point equals one percent of the loan amount. So, if you pay 2 discount points on a $200,000 loan you would pay $4,000 up-front at closing. Each discount point you pay will typically lower your loan's rate by .25% but can vary based on term, loan amount, fixed or ARM etc. Discount points may be a good idea if you plan to hold onto your home for a long period of time. This allows you to offset the costs of paying for the points. Some sellers will pay some of the discount points as a way to make their homes more attractive to buyers.
$100,000, 30-year fixed loan
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Discount points |
Interest rate |
Total cost
over 2 years |
Total cost
over 5 years |
Monthly payment |
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0.0 |
7.625% |
$19,987 |
$45,467 |
$690.40 |
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1.0 |
7.375% |
$19,576 |
$44,441 |
$674.52 |
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2.0 |
7.125% |
$19,169 |
$43,423 |
$658.77 |
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3.0 |
6.875% |
$18,766 |
$42,416 |
$643.12 |
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Discount points lower your interest rate. The longer that you hold a mortgage, the longer you will enjoy the savings of the lower interest rate. Here, if you hold onto the mortgage for five years, it makes sense to opt for the 3 point loan rather than the 0 point loan. "
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