What Is Discount Points?
Discount points are a specific type of mortgage point purchased to permanently lower the interest rate on a loan; the cost only pays off if the borrower keeps the loan long enough for the lower rate to outweigh the upfront expense.
Discount Points in plain English
Discount points are an upfront fee you pay the lender at closing in exchange for a lower interest rate. One point costs 1% of the loan amount.
How much each point lowers the rate is set by the lender. Points save money only if you keep the loan long enough for the monthly savings to add up to more than what you paid.
Formula
1 Discount Point = 1% of Loan Amount- Loan Amount
- The amount borrowed - not the purchase price.
Related forms: Break-even months = Cost of Points ÷ Monthly Payment Savings.
The rate reduction per point varies by lender, loan and day; compare Loan Estimates.
Worked example
Temporary 2-1 buydown versus one discount point
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Loan
- $400,000 at a 7.00% note rate, 30 years
- Permanent option
- 1 point lowers the rate 0.25 percentage point (lender pricing varies)
| Step | Calculation | Result |
|---|---|---|
| 1. Payment at the note rate | $400,000 at 7.00% | $2,661.21 |
| 2. Year 1 payment (5.00%) | $400,000 at 5.00% | $2,147.29 |
| 3. Year 2 payment (6.00%) | $400,000 at 6.00% | $2,398.20 |
| 4. Cost of the 2-1 buydown (the subsidy) | ($513.92 + $263.01) × 12 | $9,323 |
| 5. One point instead: cost and savings | $4,000 for $66.82 a month | break-even in 60 months |
2-1 buydown cost: $9,323. A 2-1 buydown costs about $9,323 and saves money only in the first two years. One point costs $4,000 and saves about $67 a month for as long as you keep the loan.
What this calculation leaves out
- Lenders qualify you at the full note rate, not the bought-down rate.
- Rate-per-point pricing is set by each lender daily; 0.25 point per point is a ballpark, not a quote.
- If the loan is refinanced during the buydown period, how unused subsidy is handled depends on the buydown agreement.
Try it: Discount Points with your own numbers
Interactive and illustrative: change any value and the results update instantly in your browser. The figures come from the same engines as REAIXO's full calculators.
APR vs interest rate
The interest rate sets the payment. The APR spreads lender charges over the loan, so it is the better number for comparing offers.
- Interest rate
- 6.500%
- Payment $1,896 a month
- APR
- 6.662%
- 0.162 points above the rate
- Finance charges in the APR
- $5,000
- $2,750 of third-party fees excluded
Formula
APR = the rate at which the payments’ present value equals the amount financedAmount financed = Loan − Points − Lender feesAssumptions
- Regulation Z actuarial method, fixed-rate loan held to term.
- Appraisal and title fees are third-party charges not counted as finance charges here.
- If you sell or refinance early, the real cost of upfront fees is higher than the APR suggests.
Why it matters
Points convert cash at closing into a permanently lower payment. If you refinance or sell before the break-even month, the unused value of the points is lost.
What it means for you
Who pays?
The borrower, unless a seller or builder pays them as a concession.
When is it paid?
At closing, listed in the loan costs on the Loan Estimate and Closing Disclosure.
Common mistakes
- Buying points without calculating the break-even period.
- Paying points on a loan you expect to refinance soon.
- Comparing loans by rate alone when one includes points.
Compare and common questions
Discount Points: frequently asked questions
Are discount points worth it?
Only if you keep the loan past the break-even point. Divide the cost of the points by the monthly payment saving to find how many months that takes.
How much does one discount point lower the rate?
It varies by lender and market; there is no fixed amount. Ask each lender for pricing with and without points on the same day.
Do discount points show up in the APR?
Yes. Points are finance charges, so a loan with points has a wider gap between its interest rate and its APR.
Can the seller pay my discount points?
Often, as a seller concession, within your loan program's limit on interested-party contributions.
Go deeper
Related Terms
More Financing Terms
Recommended next step
Find the break-even month for the points you are offered.
Mortgage points calculator →Sources and review
- How should I use lender credits and points (also called discount points)?, Consumer Financial Protection Bureau. Supports: Points lower the interest rate in exchange for an upfront payment; lender credits work in reverse.
- Selling Guide B3-4.1-02, Interested Party Contributions (IPCs), Fannie Mae. Supports: Seller-paid points count toward interested party contribution limits.
Where this applies: United States. Federal disclosure and servicing rules (TILA/Regulation Z, RESPA/Regulation X) apply nationwide; loan-program rules come from Fannie Mae, Freddie Mac, FHA, VA, USDA or the lender.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
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