Discount points
Discount points, also called mortgage points or simply points, are a form of pre-paid interest available in the United States when arranging a mortgage. One point equals one percent of the loan amount. By charging a borrower points, a lender effectively increases the yield on the loan above the amount of the stated 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