How to Calculate the Discount on a Loan

A discount point is a form of prepaid interest paid when closing a mortgage loan. A single mortgage point equals one percent of the mortgage loan's value. Most mortgage loans give you the option of purchasing discount points to lower your interest rate. You can calculate the value of the discount points manually with some basic information about the value of the loan and the number of points purchased.

Instructions

1. Determine the value of the loan. For example, assume the value of the loan is $500,000.

2. Determine the number of discount points you want to purchase. For example, assume you want to purchase three discount points.

3. Multiply the number of mortgage points by .01. Continuing the same example, .01 x 3 = .03. This figure represents the mortgage points expressed as a percentage.

4. Multiply the points expressed as a percentage by the loan amount. Continuing the same example, $500,000 x .03 = $15,000. This figure represents the value of the discount points or the discount of the loan.

References

• "Principles of Real Estate Finance"; Charles Long; 2010
• Bank Rate: Mortgage Points