More commonly called "points", discount points are up-front fees charged by mortgage lenders in exchange for lower mortgage rates. The cost of one point is one percent on the loan size and discount points appear on Line 802 of the HUD-1 Settlement Statement.
As a general guideline, each point paid lowers a mortgage lender's offered interest rate by 0.250%.
For example, a $200,000 home loan offered at 6.000% can be had for 5.750% if the borrower agrees to make an up-front payment of one point ($2,000).
In addition to lowering your interest rate, discount points are usually tax-deductible, too. Therefore, be sure to provide any settlement statements from the previous calendar year to your accountant during Tax Season.
Lastly, as an added note: discount points should not be confused with origination points, a one-time charge for the lender's service appearing on Line 801 of the HUD-1 Settlement Statement. Origination points are not tax-deductible.
