What Are Discount Points When Getting a Home Loan?

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What Are Discount Points When Getting a Loan?

• Dunhill Homes

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Introduction
The term, discount points, is a word within
real-estate lingo that is home-loan specific and
discount points have a distinct purpose for both
the borrower and the lender.  Lets first define
what discount points are then go over how they
work and why it can be beneficial for a
prospective homebuyer to take advantage of them.
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Discount PointsWhat They Are
Discount points deal with a specific, upfront fee
that borrowers have the option to purchase for
the purpose of reducing the amount of interest
that they would, otherwise, pay on their home
loan.  Typically, the cost of one discount point
is 1 of the mortgage loans entire amount and
that one point has the power to diminish the
loans interest rate by one-eighth to one-fourth
of the existing rate.  Not only that, but
discount points can be tax-deductible during the
year they are paid depending on which deductions
you can claim on your federal income taxes. 
Discount points can be 100 deductible!
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Discount PointsHow They Work
As mentioned, discount points reduce a borrowers
interest rate and the following hypothetical
example shows how that could be accomplished
Loan amount  200,000 Interest rate  5
Interest rate reduced by one-fourth or 0.25
Cost of each discount point 1 of entire loan
amount 2,000 per point Borrower purchases
2 discount points and pays 4,000 upfront
Reduced interest rate is, now, 4.50 instead of
5.0
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