(1) An added loan free charged by a lender to make the yield on a lower-than-market-value loan competitive with higher-interest loans.
(2) A discount point is a type of mortgage loan fee that enables a borrower to lower monthly interest rate payments by paying more upfront. A discount point may cost approximately 1% of the loan amount and can lower a borrower’s interest rate by 0.25%–0.5%. Point options vary by lender or broker, but borrowers should think about how much they’re ready to invest upfront and the length of time they expect to have the mortgage loan when deciding whether to buy points.
If a buyer expects to own the home for a long time, buyers will often consider paying more upfront to benefit from a lower interest rate for the life of the loan. On the other hand, if a buyer plans to refinance or sell the home, buyers are more likely to avoid discount points and accept the higher interest rate.