Definition - What does Discount Point mean?
A discount point is an amount of money that can be paid in advance on a mortgage loan. Each discount point is 1% of the total value of the mortgage principal. Some mortgage lenders make it mandatory to pay one discount point in advance, in order to be legally approved for the loan.
Discount points are tax deductible, and they also can reduce the interest rate on the loan. If the terms of the mortgage allow for an interest rate deduction upon the payment of discount points, then the lender is legally obligated to lower the rate.
Justipedia explains Discount Point
Essentially, discount points are a way to pay interest in advance. Lenders benefit from this by reducing the amount of time that it takes to get their money. Borrowers benefit by having their interest rates lowered. So, discount points can have an important use in mortgage repayment. However, they can also be expensive at 1% of the principal of the loan. For example, one discount point on a $300,000 loan would be $3,000. So it would be difficult for many people to pay a high number of these discount points per year.
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