What is a discount fee on a mortgage loan?
A discount fee, also known as points, is the fee paid to a mortgage lender to purchase a lower interest rate. This is also referred to as buying down the interest rate. The amount of the fee is determined by the loan amount.SignificanceThe largest expense on a mortgage debt is the overall interest expense over the life of the loan. The lower the interest rate over the life of the loan, the lower the overall interest paid.FunctionA discount fee purchase allows the borrower to lower his interest rate on his mortgage, and therefore lower his overall out-of-pocket expense.EffectsThe discount fee’s effect can be significant. If a borrower purchases a $100,000 30-year mortgage at 6 percent, his overall interest expense is $115,838.19. However, if he purchases a full discount point to drop his interest rate to 5 percent, his overall interest expense is $93,255.78.ConsiderationsA borrower should consider how long he plans on owning the home before purchasing the discount point.
