What is the purpose of discount points in a loan?

The purpose of discount points in a loan is to reduce the interest rate. When a borrower pays discount points upfront, they are essentially prepaying a portion of the loan's interest in order to lower their monthly mortgage payments over the life of the loan. Each point typically equals 1% of the loan amount, and paying these points can yield significant savings on interest costs throughout the term of the loan.

By opting to pay discount points, borrowers can benefit from a lower interest rate, which makes monthly payments more manageable and can result in substantial savings over the long run. This financial strategy is commonly utilized by borrowers who plan to stay in their homes for an extended period, allowing them to maximize the benefits of the reduced interest payments relative to the upfront costs of the points.