What Are Discount Points?

Most often referred to as just-plain "points", discount points are an up-front fee charged by a mortgage lender in exchange for a lower mortgage rate. 

The dollar value of one point is one percent on the loan size.  Discount points appear on Good Faith Estimates and HUD-1 Settlement Statements on Line 802.

Historically, each 1 point paid by a borrower lowers an offered interest rate by a quarter-percent.  Since the late-2008, however, this relationship is skewed. 

Depending on market conditions, 1 point paid by a borrower can lower a mortgage rate by up to 0.875 percent.

As an example of how points work, a $200,000 home loan may be offered at 5.500 percent with 0 points.  With 1 discount point paid at closing -- $2,000 -- the mortgage rate may lower to 5.125 percent. 

In addition to lowering your interest rate, discount points may be tax-deductible, too.  Therefore, be sure to provide your home settlement statements from the previous calendar year to your accountant during Tax Season.