Discount Points

Discount points are a way to prepay interest on your mortgage. Each point typically equals 1% of the loan amount and, in exchange, reduces your interest rate by a certain amount, though the exact rate reduction per point varies by lender and market conditions.

Paying points is optional. If you choose to pay them, you pay more upfront at closing in exchange for a lower monthly payment over the life of the loan. If you don't pay points, your rate stays at whatever the lender quotes without them.

Points appear on your Loan Estimate under origination charges, clearly labeled so you can see exactly what you're paying and what rate reduction you receive in return.

The decision to pay discount points comes down to how long you plan to keep the loan. If you pay extra upfront to lower your rate, you need to stay in the home long enough for the monthly savings to exceed the upfront cost.

This is often called the "break-even point": divide the upfront cost of the points by the monthly payment savings. The result is roughly how many months you'd need to keep the loan before the points start saving you money net of their cost. Your lender can provide the numbers specific to your situation.

Points are not always a good deal, and they're not always a bad one. The right answer depends on your circumstances, how long you'll keep the loan, and whether you'd rather preserve the cash for other uses.

A buyer has the option to pay one discount point (1% of the loan amount) in exchange for a 0.25% rate reduction. If the rate reduction saves $75 per month and the point costs $2,800, the break-even point is about 37 months. If the buyer plans to stay in the home longer than that, the points may save money over time. If they plan to sell or refinance sooner, they may not recover the upfront cost.

"Discount points and origination fees are the same thing."

They're not. An origination fee is what a lender charges for processing your loan; you don't get a rate reduction in return for paying it. Discount points are an optional purchase: you pay extra specifically to lower your interest rate. Both may appear under "origination charges" on the Loan Estimate, so it's worth reviewing each line item to understand what you're paying for and what you're getting in return.