Discount points
What is discount points?
A discount point is an upfront fee equal to 1% of the loan amount, paid to lower your interest rate. Points only pay off if you keep the loan long enough to recover the cost.
How it is calculated
Cost of points = (points ÷ 100) × loan amount
What it means in practice
How much rate reduction a point buys varies by lender and by day. A quarter of a percent per point is a common rule of thumb, but it is only a rule of thumb.
Points have their own break-even: the upfront cost divided by the monthly saving. If you expect to sell or refinance before that month, paying points loses money.
Because points are prepaid interest, they are included in APR, which is why a loan with points shows a higher APR relative to its note rate.