What are discount points and how do they affect rate, payment, and APR?

• A. Points have no impact on rate or payments.
• B. Points are only for lender profit and do not affect borrower costs.
• C. Points are prepaid interest paid to lower the note rate; lowering rate reduces monthly payments but increases up-front costs and can affect APR.
• D. Points increase the rate and lower upfront costs.

Answer: (C)

Discount points are prepaid interest paid at closing to reduce the loan’s interest rate. Each point typically amounts to 1% of the loan amount. When you buy points, the note rate goes down, which lowers your monthly principal-and-interest payment. But you pay more upfront, increasing your closing costs. Whether you come out ahead depends on how long you’ll keep the loan—the break-even point is when the monthly savings equal the extra upfront cost.

Points also affect the APR because APR reflects the total cost of borrowing, including the upfront points and other financing charges, not just the note rate. So paying points can change the APR even though the note rate is lower.