In personal finance, a fee paid upfront to reduce a mortgage interest rate is called a discount point.
One discount point is commonly equal to 1% of the mortgage amount, although the rate reduction obtained per point varies by lender, market conditions, loan type, and borrower. Points are paid at closing and are separate from the loan principal.
Borrowers compare the upfront cost with the expected interest savings over the time they keep the mortgage. A borrower who sells or refinances soon may not recover the cost, while a longer holding period can make the tradeoff more attractive. The break-even period is the upfront cost divided by the periodic savings.
Discount points are not the same as origination points or other closing costs. Tax treatment can depend on factors such as the loan’s purpose and whether IRS requirements are met, so borrowers should consult current tax guidance.