What are discount points primarily used for in real estate transactions?

Discount points are primarily used in real estate transactions to reduce the interest rate on a mortgage loan, which can lead to lower monthly payments for the borrower. When a buyer pays discount points, they are essentially prepaying some of the interest upfront at closing. Each point typically costs 1% of the loan amount and generally lowers the interest rate by a certain percentage, commonly around 0.25%.

This mechanism can be particularly beneficial for buyers who plan to stay in their home for a long enough period to recoup the costs of the points through the savings in interest payments. By choosing to pay points at the outset, borrowers can make their loans more affordable over time, which can increase their purchasing power. Thus, discount points serve an important function in making home financing more manageable for buyers.