Enter the total loan amount into the calculator to determine the value of one discount point. Note: the loan amount should be only the total value of the loan, not the purchase price.

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## Discount Point Formula

The following formula is used to calculate a discount point.

DP = .01 * LA

- Where DP is the discount point ($)
- .01 is the decimal representing 1%
- LA is the total loan amount ($)

## Discount Point Definition

A discount point refers to a fee that a borrower pays upfront to a lender at the time of closing a mortgage loan. Each discount point typically costs 1% of the loan amount.

The purpose of discount points is to lower the interest rate on the loan. By paying these points, borrowers can reduce their monthly mortgage payments over the life of the loan.

Discount points are significant for two main reasons. Firstly, they provide borrowers with the opportunity to save money in the long run. By paying additional upfront fees, borrowers can secure a lower interest rate on their mortgage loan.

This reduction in the interest rate not only reduces the monthly mortgage payment but also decreases the total interest paid over the life of the loan. Therefore, discount points are crucial for borrowers who plan to stay in their homes for an extended period.

Secondly, discount points enable borrowers to customize their loan terms to suit their financial goals and circumstances. Depending on their financial situation, borrowers can choose to pay discount points to obtain a lower interest rate or opt for a higher interest rate without points.

This flexibility allows borrowers to tailor their mortgage to align with their short-term and long-term financial objectives. For instance, borrowers who plan to sell their homes in the near future may opt for a higher interest rate without points, as they won’t benefit from the long-term savings.

## How to calculate discount points?

In this example, a buyer is purchasing a home and negotiates a lower interest rate at the exchange of the purchase of some discount points.

First, determine the total loan amount. For this problem, the house is purchased at $500,000.00 with a $100,000.00 down payment.

Subtracting the downpayment from the purchase price we get a total loan amount of $400,000.00.

During the negotiation, it’s agreed the buyer will purchase 3 discount points for a lower interest rate.

Finally, calculate the value of the discount points purchase above.

DP = .01 * LA

= .01 * 400,000 = $4,000.

Now, multiply this answer by 3 to get the total spent on discount points.

= 3 * $4,000

= $12,000.00