Financial Markets and Institutions (2-downloads)

3. Discount points. Discount points (or simply points) are interest payments

made at the beginning of a loan. A loan with one discount point means that the

borrower pays 1% of the loan amount at closing, the moment when the borrower

signs the loan paper and receives the proceeds of the loan. In exchange for the

points, the lender reduces the interest rate on the loan. In considering whether

to pay points, borrowers must determine whether the reduced interest rate

over the life of the loan fully compensates for the increased up-front expense.

Access

www.interest.com

to

track mortgage rates and

shop for mortgage rates in

different geographic areas.

G O   O N L I N E

---

326

Part 5 Financial Markets

To make this determination, borrowers must take into account how long they

will hold on to the loan. Typically, discount points should not be paid if the bor-

rower will pay off the loan in five years or less. This breakeven point is not

surprising since the average home sells every five years.

0

4

8

10

12

6

1995

1993

1991

1989

1987

1985

Interest

Rates (%)

2001

1999

1997

2003

2005

2009

2007