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Discount points (also referred to as
points) are an upfront fee paid to the
lender. One discount point equals 1% of the loan amount. Generally,
the more discount points, the lower the interest rate.
Most lenders offer many different discount rate options;
you can pay more discount points at closing and lower the interest rate a lot,
or you can pay fewer discount points and lower the interest rate a little bit.
If you ask, most lenders will provide a list of rate/fee options.
All you have to do is to evaluate each of the options and
choose the one that minimizes your total mortgage cost, potentially saving thousands
To see how it is done, read the
discount points case study.
Note: If you get a $100,000 mortgage with 2 discount points,
you will need to pay 2% of the loan
(i.e., $2,000) at closing. Since you are required to pay $2,000
upfront, you actually only receive $98,000 from the lender.