Discount Points

An added loan fee charged by a lender to increase the yield on a lower-than-market interest loan and to make the loan more competitive with higher-interest loans. Borrowers often pay discount points upfront in order to gain a long-term, lower interest rate, an advantage for the buyer who plans on keeping the loan for a long period of time, and not so useful for loans held only a few years. Each point is equal to 1 percent of the loan amount. Either the buyer or the seller may pay the points. Points paid for residential real estate can usually be used to reduce taxable income in the year in which they are paid, a benefit to the buyer, even if the seller pays the points.