In closing costs, what are discount points primarily used for?

Discount points are primarily a strategy that borrowers can use to lower the interest rate on their mortgage loan. When a borrower pays for discount points, they are essentially prepaying a portion of the interest on the loan to secure a lower rate. Each point typically costs 1% of the loan amount and can reduce the interest rate by a set percentage, often around 0.25%.

This mechanism allows borrowers to decrease their monthly mortgage payments over the life of the loan, making homeownership more affordable in the long term. It is important for borrowers to evaluate their financial situation, including how long they plan to stay in the home, as paying for discount points may be beneficial if they remain in the property long enough to recoup the upfront cost with the savings from lower payments.

Other options do not align with the purpose of discount points. While reducing overall closing costs could be a goal, discount points specifically relate to interest rates. Increasing the loan amount does not tie into the function of discount points. Lastly, factoring in property taxes is unrelated, as discount points focus solely on loan interest rates.