Simple Real Estate Definitions: Discount Points
More commonly called 'points', discount points are up-front fees charged by mortgage lenders in exchange for lower mortgage rates.
The cost of one point is one percent on the loan size and discount points appear on Line 802 of the HUD-1 Settlement Statement.
As a general guideline, each point paid lowers a mortgage lender's offered interest rate by 0.250%.
For example, a $200,000 home loan offered at 6.000% can be had for 5.750% if the borrower agrees to make an up-front payment of one point ($2,000).
Discount points can be an effective sales strategy for home sellers. In some areas of Indianapolis, where there is a lot of competition in the resale real estate market, sellers offering to pay discount points can help the buyer get a lower loan cost. It is generally less than price reductions, saving both the seller and the buyer money.
In addition to lowering your interest rate, discount points (as well as other closing costs) may be tax-deductible, too. Therefore, be sure to provide any settlement statements from the previous calendar year to your accountant during Tax Season.