On what amount are discount points based during a loan?

Discount points are calculated based on the loan amount rather than the total purchase price, down payment, or appraised value. When a borrower opts to pay discount points, they are essentially prepaying interest to lower the interest rate on their mortgage over time. Each point typically represents 1% of the loan amount and is paid upfront at closing.

For example, if the loan amount is $200,000 and a borrower decides to pay two discount points, they would pay $4,000 (2% of $200,000). This payment directly reduces their interest rate, making their long-term borrowing costs lower. Understanding that discount points are tied to the loan amount helps borrowers better assess how they can save money over the life of their mortgage by choosing to pay these points.