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 a little up-front in order to save big 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 loanÕs rate by .25%.

Discount points are 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. Often 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

		Discount points	Interest rate	Total cost over 2 years	Total cost over 5 years	Monthly payment
		0.0	7.625%	$19,987	$45,467	$690.40
		1.0	7.375%	$19,576	$44,441	$674.52
		2.0	7.125%	$19,169	$43,423	$658.77
		3.0	6.875%	$18,766	$42,416	$643.12

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.

See: Point, Origination fee, Buydown