What are discount points in real estate transactions?

In real estate transactions, discount points refer to a cost associated with borrowing money for a mortgage. Specifically, one discount point is equal to one percent of the loan amount. Borrowers may choose to pay discount points upfront to reduce the interest rate on their mortgage, which can lead to lower monthly payments over the life of the loan. This is a common strategy used to make financing more affordable in the long term.

The concept of discount points is particularly relevant in the context of mortgage financing, as it provides an option for borrowers to pre-pay interest, which can ultimately save money. For instance, if someone borrows $200,000 and pays two points, that would equal $4,000 (2% of the loan amount) paid at closing. In return, the lender typically offers a lower interest rate, making monthly payments more manageable.

Understanding discount points is important for buyers as it can significantly affect the financing terms of a home purchase and the overall affordability of the mortgage. This option allows for strategic financial planning when considering various financing alternatives in real estate transactions.