The discount points charged by a lender on a loan is a percentage of the:

When a lender charges discount points, it is calculated as a percentage of the loan amount. Discount points are essentially prepaid interest that a borrower pays upfront to obtain a lower interest rate over the life of the loan. Each point typically costs 1% of the total loan amount and is deducted from the loan amount to lower the interest rate.

For example, if a borrower takes out a $100,000 mortgage and the lender charges 2 discount points, the borrower would pay $2,000 upfront to achieve a lower interest rate. This upfront payment can result in significant savings over time as it reduces the monthly mortgage payment.

Understanding that discount points apply specifically to the loan amount rather than to the interest rate, appraised value, or closing costs is crucial for anyone involved in real estate transactions, as it directly impacts the financial aspects of obtaining a mortgage. This concept is fundamental for real estate professionals to effectively advise clients regarding mortgage products and costs associated with obtaining financing.