Some lenders require you to prepay a portion of the interest due on your mortgage as a condition of approving the loan. They set the amount due at one or more discount points, with each discount point equal to 1% of the mortgage loan principal.
For instance, if you must pay one point on a $100,000 mortgage, you owe $1,000.
From your perspective, the advantages of paying discount points are that your long-term interest rate is lowered slightly for each point you pay, and prepaid interest is tax deductible. The advantage, from the lenders' point of view, is that they collect some of their interest earnings up front.
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- Buy down, Discount rate, Loan note, Points, Prepayment penalty, Rule of 78
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