A type of mortgage loan fee that enables a borrower to lower monthly interest rate payments by paying more upfront. A discount point typically costs 1% of the loan amount and can lower a borrower’s interest rate by 0.25%–0.5%. Point options vary by lender or broker, but borrowers should think about how much they’re ready to invest upfront and the length of time they expect to have the mortgage loan when deciding whether to buy points.
If a buyer expects to own the home for a long time, it might make sense to pay more upfront to benefit from a lower interest rate for the life of the loan. On the other hand, if they don’t plan to own the home for very long or plan to refinance their loan, they should not purchase discount points and instead go with the higher interest rate.