What are discount points in mortgage lending?

• A. Upfront fees paid to obtain a higher interest rate
• B. Ongoing fees paid monthly for loan processing
• C. Upfront fees paid to obtain a lower interest rate
• D. Fees charged by the home inspection

Answer: (C)

Discount points are upfront fees paid at closing to obtain a lower interest rate on a mortgage. Each point typically costs about 1% of the loan amount and reduces the interest rate by a small amount, which can lower monthly payments and total interest over the life of the loan if you keep the loan long enough. This is different from ongoing monthly fees or services like loan processing, and from a home inspection fee. Paying points is a way to trade some upfront cost for a lower rate, with the decision hinging on how long you plan to hold the loan and when you reach the break-even point.