Final answer:
Discount points are a percentage of the loan amount and are paid upfront at closing. They can lower the interest rate on the mortgage, resulting in potential long-term savings.
Step-by-step explanation:
When obtaining a mortgage loan, the buyer often has to pay discount points. Discount points are a percentage of the loan amount and are paid upfront at closing. Each discount point typically costs 1% of the loan amount and can be used to lower the interest rate on the mortgage.
For example, if you are obtaining a $200,000 mortgage loan and decide to pay two discount points, you would pay $4,000 upfront at closing (2% of $200,000).
Discount points can be beneficial for buyers who plan to stay in their home for a long time since the lower interest rate can result in significant savings over the life of the loan.