What is a discount point in mortgage lending?

A discount point in mortgage lending refers to a fee paid upfront by the borrower to the lender in exchange for a reduced interest rate on the mortgage. Each discount point typically costs 1% of the total loan amount and generally lowers the interest rate by a certain percentage, usually around 0.25%. This option is a strategic choice for borrowers who may want lower monthly payments or plan to stay in their home for a longer period, making the upfront payment a worthwhile investment over time.

In contrast, the other options do not accurately describe discount points. An expedited fee for processing a loan does not provide any rate reductions and is separate from discount points. Insurance premiums serve a different function, primarily protecting lenders and borrowers in case of default or damage to the property. Lastly, bonuses for loan officers relate to compensation structures and are not associated with the concept of discount points. By understanding discount points, borrowers can make informed decisions about their mortgage financing strategies.