What Are Discount Points?
Discount Points: Upfront fees, each equal to 1% of the loan amount, paid to lower your interest rate.
Also called: points, buying down the rate
Discount points are fees you pay at closing to lower your interest rate. One point costs 1% of the loan amount.
How much a point lowers the rate
It varies by lender and market, but one point often lowers the rate by roughly 0.125% to 0.25%.
Break-even
Divide the cost of the points by the monthly savings to see how long it takes to come out ahead.
Example: 1 point on a $400,000 loan costs $4,000 and lowers the rate from 6.875% to 6.625%, saving about $66 a month. Break-even is about 61 months, or 5 years. If you keep the loan longer, the points pay off.
The opposite: lender credits
You can also take a higher rate in exchange for a lender credit toward closing costs.
Good to know
Points paid on a primary home purchase may be tax-deductible. Ask a tax professional.