Discount points, also sometimes referred to as ‘mortgage points’, are fees paid to a lender which can help lower the cost of the interest rate on your monthly mortgage payment.
What are discount points?
Discount points, or mortgage points, are fees you can pay to your lender while closing on a property that will help ‘buy down’ the interest rate on your mortgage payments.
In addition to shopping around for the best mortgage rates, some prospective homeowners buy ‘discount points’ from the bank or lender to try and lower their interest rates. (Another option would be to put more money toward your down payment—both alternatives have their pros and cons, so it’s worth discussing with a financial advisor.)
Each point a borrower buys costs 1 percent of the mortgage amount (so one point on a $400,000 mortgage would cost $4,000). You can buy less than 1 point, and you can also buy fractions of a point.
Generally, each point lowers the interest rate by 0.25 percent; one discount point would lower a mortgage rate of 5% to 4.75% for the life of the loan. Keep in mind that the terms might differ between lenders.
When do you pay discount points?
You pay for your discount points at the time of closing on your property. The number of points will be listed on your loan estimate document—which you’ll get after you apply for a mortgage—and on the closing disclosure, which you’ll get before the closing of the loan.
Things to know about discount points
As a borrower you’ll see benefits down the road, as you’ll enjoy a lower interest rate… but it’s only worth it for you if you plan on holding on to the property long-term and have a fixed-term mortgage to reap the benefits of that lowered interest rate.
If you don’t plan on keeping the mortgage for long—maybe it’s a starter house, or a property you plan to refurbish and then sell—it may be better to forego discount points and take a higher interest rate instead.