Final answer:
Discount points on a mortgage are a percentage of the amount borrowed, paid upfront to reduce the interest rate on the mortgage.
Step-by-step explanation:
Discount points on a mortgage are computed as a percentage of the amount borrowed. When a borrower opts to pay discount points, they are essentially prepaying interest to receive a lower rate on their mortgage. This upfront payment is calculated based on the total loan amount, not on the down payment, selling price, or closing costs.
For example, if a borrower is taking a mortgage of $100,000 and the lender charges 1 discount point, it would mean the borrower pays 1% of the loan amount upfront, which is $1,000. This can lead to significant savings on interest over the life of the mortgage, though it does require more cash at closing.