What are Discount Points?

Explanation of Discount Points


One of the most misunderstood aspects of the mortgage banking industry is that of discount points. Being referred to by many different names worsens the confusion. "Point", "Discount Points", "Discount"," Investor Fee", and "Marketing Fee" are just a few of the names referring to the same thing. Whatever the name, the definition is the same.

The primary purpose of "points" is to increase the yield to the investor of the loan. By collecting "points" the investor is able to provide below market interest rates to the borrower. An example would be:

An investor wished to invest $50,000. He has the choice of investing in money market certificates which yield 13.5% or a mortgage loan at 12%. The investor would, of course, prefer the higher yielding money market investment. However, if we add discount points to the picture and offer the investor a mortgage loan at 12% with 6 discount points (6% of the mortgage amount) up front, the investor is offered a far more attractive investment.

Keep these facts in mind

  • Points enable the lender to offer lower interest rate FHA, VA, and conventional loans to their borrowers.
  • Points help enable the seller to sell, the buyer to buy, the builder to more easily sell his product and the Realtor to provide buying clients with an easily accessible means of home financing.
  • Points fluctuate because the "cost" of borrowing money goes up and down, depending on supply and demand.

To sell properties today, we not only need ready, willing, and able buyers and sellers – we also need to obtain financing. We can obtain financing because of POINTS. Through the use of this tool, lenders are able to invest their money in mortgage loans and realize a rate of return comparable to other investment opportunities. Thus, it can be said that: Points are the magic ingredient behind the majority of activity in Real Estate.