What is a loan discount point?

A loan discount point is a fee a lender may charge to a borrower to offer a lower than market interest rate. A loan discount point is considered prepaid interest. One loan discount point is equal to 1.000% of the loan amount on any given loan (i.e., $100,000 x 1.000% = $1,000). If a lender offers a borrower a 5.000% interest rate, but the borrower would prefer 4.750%, the lender will receive $250 per year less interest on the money they loan ($100,000 x 5.000% = $5,000 vs $100,000 x 4.750% = $4,750). The lender may charge the borrower a loan discount point of 1.000%, which is $1,000, and represents the first 4 years of interest the lender will lose ($250 x 4 = $1,000) if the borrower opts for the 4.750%.