Discount Points
Also known as: Mortgage Points, Rate Buydown, Points
Upfront fees paid to the mortgage lender at closing in exchange for a lower interest rate. One point equals 1% of the loan amount and typically reduces the rate by 0.25%.
Detailed Explanation
Discount points are essentially prepaid interest. You pay more upfront in exchange for a lower monthly payment over the life of the loan.
One discount point costs 1% of the loan amount. On a $400,000 loan, one point costs $4,000 and typically reduces your interest rate by about 0.25% (the exact reduction varies by lender and market conditions).
Builder preferred lender incentives sometimes include rate buydowns — the builder pays for discount points on your behalf to lower your rate. This can be a valuable incentive, but compare the total deal with outside lenders.
In Your Contract
Discount points appear on your Loan Estimate and Closing Disclosure. Builder incentives for rate buydowns should be documented in a lender incentive addendum.
Key Points
- 1One point = 1% of loan amount, typically lowers rate by ~0.25%.
- 2Makes sense if you plan to stay in the home long enough to recoup the upfront cost.
- 3Calculate the break-even point: upfront cost divided by monthly savings.
- 4Builder lender incentives sometimes include free rate buydowns.
- 5Points are generally tax-deductible in the year of purchase.
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