Discount Points, PITI and Amortization

Discount Points and Upfront Loan Fees

When purchasing or refinancing real estate, borrowers encounter various upfront fees charged by lenders to originate the loan or alter its pricing. A central fee on licensing examinations is the discount point. One discount point equals one percent of the loan amount. Lenders charge discount points to increase the upfront yield on a mortgage loan. Borrowers choose to pay discount points to obtain a lower note interest rate on their mortgage, though the actual interest-rate reduction depends strictly on the lender's pricing and loan terms rather than a fixed universal formula.

It is critical to distinguish discount points from other closing costs. A loan origination fee is a charge assessed for making or arranging a loan, which may cover administrative costs such as processing and underwriting. Loan origination fees can be calculated as a percentage of the loan amount or billed as a flat dollar amount. In contrast, other standard loan-related charges may include application, underwriting, processing, credit-report, and appraisal fees. Among these, appraisal and credit-report charges generally pay for third-party services, making them distinct from discount points. Discount points and origination fees are typically paid by the borrower at the time of closing.

Under federal tax law, whether discount points are deductible depends on specific criteria, including the purpose of the loan, how the points are paid, and whether the borrower itemizes deductions. Tax rules can treat purchase loans and refinance loans differently. Real estate salespersons work under a supervising broker and should remind clients to review their individual circumstances with qualified tax advisors.