Discount points are calculated based on which amount?

Discount points are calculated based on the loan amount. Discount points are essentially prepaid interest that borrowers can choose to pay at the time of closing in order to lower the interest rate on their mortgage over its term. Each point is equal to 1% of the loan amount, which means that a borrower looking to buy down their interest rate needs to consider the total amount they are borrowing, rather than the purchase price or any other assessment.

Thus, if a borrower takes out a loan of $200,000 and pays two discount points, they would be paying $4,000 (2% of $200,000) to lower their interest rate. This calculation is directly tied to the amount of the loan itself, confirming that the focus for calculating discount points is on the loan amount rather than the purchase price, market value, or appraisal value.