Lending Math
Discount Points: Real Estate Exam Math Explained
A discount point is 1% of the loan amount paid upfront to the lender to reduce the interest rate (typically by 0.25% per point). Points are part of closing costs. The exam tests both the dollar amount of points and whether paying points is worth it.
The Formula
1 discount point = 1% of the loan amount. Cost of points = Loan Amount × Number of Points × 1%.
Each point typically reduces the interest rate by ~0.25%, but the exact rate reduction varies by lender and market.
Two Worked Examples
Question 1
Loan amount: $300,000. Borrower pays 2 discount points. How much are points?
Cost = $300,000 × 2 × 1% = $6,000.
Question 2
A buyer takes a $400,000 loan. They can pay 1.5 discount points to reduce the rate from 6.5% to 6.125%. How much do points cost, and approximately how long until they break even via lower monthly payments? (Approximate monthly savings: $96.)
Points cost: $400,000 × 1.5 × 1% = $6,000. Break-even months: $6,000 ÷ $96 = ~62.5 months (about 5 years).
When to Pay Points
Pay points if you'll keep the loan past the break-even period (often 5–7 years)
Don't pay points if you'll refinance or sell before break-even
Points are tax-deductible in some scenarios — consult tax advisor
Origination points (different from discount points) are lender fees, not rate-buy-down
Sellers can sometimes pay points on behalf of buyers (within program limits)
Practice Lending Math
Drill points, LTV, and qualification problems together.
Related Lending Pages
Discount Points FAQ
Are discount points tax-deductible?
Generally yes for primary residence purchases (in the year paid) and proportionally over the loan term for refinances. Consult a tax advisor for specifics.
How much does each point reduce the rate?
Typically 0.25% per point, but it varies by lender and market conditions. Always confirm with the loan estimate.
What's the difference between origination and discount points?
Origination points are lender fees for processing the loan. Discount points are paid to buy down the interest rate. Both look like 'points' but serve different purposes.