Real Estate Calculating Mortgage Discount Points

Mortgage discount points are fees paid by borrowers to lower their interest rate on a home loan. This calculator helps you determine how much you'll pay in discount points and how they affect your overall mortgage costs.

What Are Discount Points?

Discount points are fees paid to the lender at closing to reduce the interest rate on a mortgage. Each point equals 1% of the loan amount. For example, if you take out a $200,000 mortgage and pay 1 point, you'll pay $2,000 upfront.

Discount points are different from origination fees, which are paid to the mortgage broker. While origination fees are paid at closing, discount points are paid to the lender and reduce the interest rate.

Why Use Discount Points?

Borrowers typically use discount points to:

Lower their monthly mortgage payments
Reduce the total interest paid over the life of the loan
Qualify for a larger loan amount
Improve their loan terms

Discount points are a one-time cost that can save you money in the long run by reducing your interest payments. However, they increase your upfront costs and may not be worth it for short-term loans.

How Discount Points Work

When you pay discount points, the lender reduces your interest rate. The amount of the rate reduction depends on the lender's pricing and market conditions. Typically, each point reduces the interest rate by about 0.25% to 0.5%.

Discount Point Cost: Points × Loan Amount

Interest Rate Reduction: Points × Rate Reduction per Point

New Interest Rate: Original Rate - (Points × Rate Reduction per Point)

Example Calculation

Suppose you have a $200,000 mortgage with an original interest rate of 6%. If you pay 1 point (1% of the loan amount), you'll pay $2,000 upfront. If each point reduces the rate by 0.5%, your new interest rate will be 5.5%.

Points Paid	Upfront Cost	Rate Reduction	New Interest Rate
0	$0	0%	6.0%
1	$2,000	0.5%	5.5%
2	$4,000	1.0%	5.0%

Examples of Discount Points

Here are some real-world examples of how discount points affect mortgage costs:

Example 1: 30-Year Fixed Rate Mortgage

Loan Amount: $250,000
Original Interest Rate: 5.5%
Points Paid: 2
Rate Reduction per Point: 0.5%

Upfront Cost: 2 × $2,500 = $5,000
New Interest Rate: 5.5% - (2 × 0.5%) = 4.5%
Monthly Payment Reduction: Approximately $125
Total Interest Saved Over 30 Years: Approximately $10,000

Example 2: 15-Year Fixed Rate Mortgage

Loan Amount: $300,000
Original Interest Rate: 4.8%
Points Paid: 1
Rate Reduction per Point: 0.25%

Upfront Cost: 1 × $3,000 = $3,000
New Interest Rate: 4.8% - (1 × 0.25%) = 4.55%
Monthly Payment Reduction: Approximately $80
Total Interest Saved Over 15 Years: Approximately $4,500

Frequently Asked Questions

Are discount points worth it?

Discount points can be worth it if you plan to stay in your home for a long time. The upfront cost is offset by lower monthly payments and reduced total interest. However, if you plan to sell or refinance soon, the points may not be worth the cost.

How many discount points should I pay?

The number of points you should pay depends on your financial situation and loan terms. Generally, 1-2 points are common for conventional loans, while jumbo loans may require more points. Consult with a mortgage professional to determine the best number of points for your situation.

Can I get discount points refunded?

In some cases, you may be able to get a partial refund of discount points if you refinance or sell your home. However, this is not guaranteed and depends on the lender's policies and market conditions. Always check with your lender about potential refund options.