Discount points, also called mortgage points or simply points, are a form of pre-paid

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...

available in the United States when arranging a

mortgage A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...

. One point equals one percent of the

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...

amount. By charging a borrower points, a lender effectively increases the yield on the loan above the amount of the stated

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

. Borrowers can offer to pay a lender points as a method to reduce the interest rate on the loan, thus obtaining a lower monthly payment in exchange for this up-front payment. For each point purchased, the loan rate is typically reduced by anywhere from 1/8% (0.125%) to 1/4% (0.25%). Selling the property or refinancing prior to this break-even point will result in a net financial loss for the buyer while keeping the loan for longer than this break-even point will result in a net financial savings for the buyer. Accordingly, if the intention is to buy and sell the property or refinance, paying points will cost more than just paying the higher interest rate. Points may also be purchased to reduce the monthly payment for the purpose of qualifying for a loan. Loan qualification based on monthly income versus the monthly loan payment may sometimes only be achievable by reducing the monthly payment through the purchasing of points to buy down the interest rate, thereby reducing the monthly loan payment. Discount points may be different from origination fee,

mortgage arrangement fee Mortgage arrangement fee, also known as a completion fee or a mortgage product fee, is a term used to describe the fee charged by some lenders to cover administration and primarily the reserving of funds for fixed rate and/or discounted rate mortgag ...

or broker fee. Discount points are always used to buy down the interest rates, while origination fees sometimes are fees the lender charges for the loan or sometimes just another name for buying down the interest rate. Origination fee and discount points are both items listed under lender-charges on the HUD-1 Settlement Statement. The difference in savings over the life of the loan can make paying points a benefit to the borrower. Any significant changes in fees should be re-disclosed in the final

good faith estimate A good faith estimate, referred to as a GFE, was a standard form that (prior to 2015) had to be provided by a mortgage lender or broker in the United States to a consumer, as required by the Real Estate Settlement Procedures Act (RESPA). Since Augu ...

(GFE). Also directly related to points is the concept of the ' no closing cost loan', in which the consumer accepts a higher interest rate in return for the lender paying the loan's closing costs up front. In some cases a purchaser can negotiate with the seller to get them to pay seller's points which can be used to pay mortgage points.

References

External links

irs.gov/publications/p936
– IRS Form 936 defines a point for the purpose of deducting mortgage interest for U.S. income taxes {{Authority control Mortgage Mathematical finance Interest