What are discount points used for in a mortgage?

• A. To increase the principal amount of the loan
• B. To reduce the loan term
• C. To lower the interest rate on a mortgage loan
• D. To cover closing costs

Answer: (C)

Discount points are a tool that borrowers can use to decrease the interest rate on their mortgage loan. Each point typically costs 1% of the loan amount and can lower the mortgage interest rate, often by a certain percentage (for example, 0.25% per point). This reduction in the interest rate can lead to lower monthly payments over the life of the loan, making it a financially beneficial option for borrowers who plan to stay in the home long-term. This strategy allows borrowers to buy down their rate, which can result in substantial savings in total interest payments over the course of the mortgage.

In contrast, increasing the principal amount of the loan is not the purpose of discount points, as they are primarily focused on managing the cost of borrowing rather than increasing the amount borrowed. Although reducing the loan term could indirectly result in a lower overall interest paid, discount points specifically target interest rates rather than the term duration itself. Lastly, while some closing costs can be negotiated or covered through different lender programs, discount points specifically relate to the interest rate on the loan rather than serving as a method to cover closing costs.