Discount points charged by a lender on a loan are based on what?

Discount points charged by a lender are calculated based on the loan amount. This means that the total cost you will pay for the discount points is determined by multiplying the percentage of the points by the total loan amount. Each point typically represents 1% of the total loan amount. For example, if you are taking out a loan of $200,000 and the lender charges 2 points, the cost of the discount points would be $4,000 ($200,000 x 2%).

Understanding this is crucial as it directly impacts the upfront costs associated with obtaining a mortgage. Discount points are often used by borrowers who want to lower their interest rates over the life of the loan. The borrower should weigh the benefits of a lower interest rate against the initial cost of the discount points, which are calculated on the basis of the loan amount rather than on aspects like the sale price of the property or the borrower's credit score.