What percentage of a loan does one discount point represent?

One discount point represents 1.00% of the total loan amount. This is a key concept in financing since discount points are used as a way to reduce the interest rate on a mortgage. When a borrower pays points up front, they are essentially pre-paying interest in exchange for a lower monthly payment over the life of the loan.

For instance, if a borrower takes out a $200,000 loan and decides to pay two discount points, they would pay $4,000 upfront (which is 2% of the loan amount) to lower their interest rate. Understanding this concept is crucial for borrowers to make informed decisions regarding the costs and benefits of paying discount points.

This knowledge allows individuals to better evaluate options in their mortgage financing choices, providing insights into how upfront payments might lead to long-term savings in interest costs.