What purpose does a discount point serve in a mortgage loan?

A discount point in a mortgage loan serves to reduce the overall interest cost over the life of the loan. When a borrower pays for discount points, they are making an upfront payment to lower their mortgage interest rate. Typically, one discount point is equivalent to one percent of the loan amount and results in a decrease in the interest rate by a predetermined amount, often around 0.25 percentage points.

This reduction in the interest rate translates to lower monthly payments and significant savings on interest over the term of the loan, ultimately making homeownership more affordable for the borrower. The choice of using discount points can be very strategic, especially for those who plan to stay in their home for a long time, as the initial investment pays off in reduced payments over time.