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Points (Discount Points)
Upfront fees paid to the lender to reduce the interest rate, where one point equals 1% of the loan amount.
Definition
Discount points are prepaid interest that a borrower pays at closing to buy down the interest rate. One point costs 1% of the loan amount — so on a $500,000 loan, one point is $5,000. Each point typically lowers the rate by about 0.25%, though this varies by lender and market. Paying points makes sense when you plan to hold the property long enough to recoup the upfront cost through lower monthly payments. The break-even period is usually 3 to 5 years. Conversely, choosing a higher rate can generate lender credits that offset closing costs.
How This Relates to DSCR Loans
DSCR borrowers often buy points to improve cash flow or choose higher rates for lender credits to reduce out-of-pocket costs at closing.
Related Terms
Interest Rate
The percentage charged by a lender for borrowing money, applied to the outstanding loan balance.
Origination Fee
A fee charged by a lender or broker for processing and underwriting a new loan.
Closing Costs
Fees and expenses paid at the closing of a real estate transaction beyond the purchase price.
APR (Annual Percentage Rate)
The annualized cost of a loan including interest and fees, expressed as a percentage.
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