How is one discount point defined in terms of loan amount?

One discount point is defined as one percent of the loan amount. This concept is vital in understanding how points work in real estate financing. When a borrower pays discount points, they are essentially prepaying some interest on the loan to lower the interest rate.

For example, if a borrower takes out a loan of $100,000 and opts to pay one discount point, they would pay $1,000 upfront to reduce their monthly payment or interest rate. This mechanism can significantly affect the overall cost of the loan and can be a strategic financial decision for borrowers depending on their long-term plans.

Recognizing this definition enables clear comprehension of how discount points are calculated and applied, which is crucial for effective mortgage management and financial planning in real estate transactions.