Discount point

A fee added to your closing costs in exchange for a lower interest rate on a loan

The basic idea of discount points is to pay a little up-front in order to save big over the life of the loan. One discount point equals one percent of the loan amount. So, if you pay 2 discount points on a $200,000 loan you would pay $4,000 up-front at closing. Each discount point you pay will typically lower your loan’s rate by .25%.

Discount points are a good idea if you plan to hold onto your home for a long period of time. This allows you to offset the costs of paying for the points. Often sellers will pay some of the discount points as a way to make their homes more attractive to buyers.

Discount points lower your interest rate. The longer that you hold a mortgage, the longer you will enjoy the savings of the lower interest rate. Here, if you hold onto the mortgage for five years, it makes sense to opt for the 3 point loan rather than the 0 point loan.