A point, also called a "discount point," is a charge typically used to reduce an interest rate. One point equals one percent of the loan amount. For each point purchased, the loan rate is typically reduced by 1/8 (.125%). Borrowers can offer to pay a lender points as a method to reduce the interest rate on the loan, and in return, the borrower will receive a lower monthly payment.
There is a specific point in the life of the loan where money spent to buy down the interest rate would equal the money saved by making reduced loan payments .
The difference in savings over the life of the loan can make paying points beneficial to the borrower. If a borrower intends to stay in their home for an extended period of time, it may be worthwhile to pay additional points in order to obtain a lower interest rate. Any significant changes in fees should be re-disclosed in a good faith estimate.
Discount points may be different from origination fees. Discount points are always used to buy down the interest rate, while origination fees are fees the lender may charge in conjunction with making the loan. Origination fees and discount points will be disclosed separately.