A Discount Point is a type of prepaid mortgage interest that allows a borrower to buy themselves a lower interest rate. A “point” equals 1% of the loan amount. Paying a point may lower the loan’s interest rate by 0.125% to 0.25%, depending on current loan rates.
Prepaying mortgage interest via discount points may or may not make sense for a homeowner, depending on how long they anticipate holding the loan. Borrowers who hold a mortgage for 4 years or less will generally pay more in discount points than they save in lower interest rate payments. Holding a loan for a longer term will save the borrower money.