How Discount Points and Rebate Points Work

How Discount and Rebate Points Work

enders normally offer the same loan at various interest rates depending on how many points you choose.

Pay more points, and you'll get a lower rate. Or, in exchange for a higher rate, get rebate points to offset some of your closing costs.

Example: 8.00% loan with zero points

Paying discount points

Each discount point you pay typically lowers your interest rate by about 0.25%. So, if the current market rate with zero points is 8.00%, you could pay a lender to reduce it to 7.75% by paying one discount point. On a $100,000 loan, that one discount point would cost $1,000.

Getting rebate points

Each rebate point you receive typically increases your interest rate by about 0.25%.

So, using an 8.00% rate with zero points, you could get one rebate point in exchange for increasing your interest rate to 8.25%. On a $100,000 loan, that one rebate point would equal a $1,000 credit towards your closing costs.

Note that you can't get any cash from rebate points-- and they can only pay for some of your closing costs.

Costs they don't cover

Rebate points don't cover prepaid hazard insurance, prepaid interest, mortgage insurance impounds, hazard insurance impounds, and property tax impounds.