Discount Points

What are discount points?

Discount points are an upfront fee you pay your lender at closing in exchange for a lower interest rate. They're often called points.

Points are figured as a share of your loan amount, and they're added to your closing costs. By paying points, you pay more up front and get a lower rate, so you pay less over time.

How much a point lowers your rate isn't fixed. It depends on the lender, the kind of loan and market conditions.

Sources: Consumer Financial Protection Bureau, "Closing disclosure explainer"; Consumer Financial Protection Bureau, "How should I use lender credits and points (also called discount points)?"; Consumer Financial Protection Bureau, "Data Spotlight: Trends in discount points amid rising interest rates"

What are lender credits?

Lender credits are money from your lender that lowers your closing costs, in exchange for a higher interest rate. They work like points in reverse.

With lender credits, you pay less up front but more over time, because the rate is higher. The more lender credits you get, the higher your rate will be.

Lender credits are figured the same way as points. A lender's worksheet may call them negative points.

Source: Consumer Financial Protection Bureau, "How should I use lender credits and points (also called discount points)?"

Where do points and lender credits show up on your loan forms?

Points and lender credits show up on page 2 of your Loan Estimate and Closing Disclosure. Points are in Section A. By law, points listed on those forms must be connected to a lower interest rate.

Lender credits show up as a negative number on the Lender Credits line in Section J. They lower the amount you pay at closing.

Outside those forms, the word can mean other things. Some lenders call any upfront fee figured as a share of the loan amount points, even if it doesn't lower your rate. The CFPB suggests asking lenders what effect any points or credits will have on your interest rate.

Source: Consumer Financial Protection Bureau, "How should I use lender credits and points (also called discount points)?"

How can you compare loan offers with and without points?

One way to compare loan offers with and without points is to ask a loan officer for two options: one with points or credits and one without. The CFPB suggests asking the loan officer to figure the total costs of each over a few possible time frames.

Those time frames are the shortest, the longest and the most likely amount of time you can see yourself keeping the loan.

When comparing offers from different lenders, the CFPB suggests asking each one for the same amount of points or credits. Lenders price loans differently, so some cost more or less overall than others either way.

Source: Consumer Financial Protection Bureau, "How should I use lender credits and points (also called discount points)?"

What is the break-even period for discount points?

The break-even period is how long you need to keep the loan for the monthly savings from a lower rate to add up to what you paid for points. The CFPB says you can roughly estimate it by dividing the cost of the points by your monthly savings.

The CFPB says most borrowers benefit from points only if they keep the mortgage past the break-even period. It also says points are less useful for people who are short on cash or who expect to refinance or move soon.

Source: Consumer Financial Protection Bureau, "Data Spotlight: Trends in discount points amid rising interest rates"