Home Loans 101: What are Discount Points?

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Discount points are a form of prepaid interest or fee that homebuyers can choose to pay at the closing of a mortgage to reduce their long-term interest rates. By paying these points upfront, buyers can effectively lower the interest rate on their monthly mortgage payments.

Each discount point typically costs 1% of the total loan amount and can reduce the interest rate by approximately 0.25%, although the exact reduction can vary depending on the lender and the current market conditions.

This means that if you take out a $200,000 mortgage, one discount point would cost $2,000. In exchange for this upfront payment, your monthly payments would be lower for the life of the loan, potentially saving you a significant amount of money over the years.

This strategy can be particularly beneficial for those who plan to stay in their home for an extended period, as the long-term interest savings can outweigh the initial cost of the discount points.

Essentially, by paying more at the beginning of your mortgage term, you can enjoy reduced monthly payments and overall interest costs, leading to substantial savings over time.