Discount Points

A type of prepaid interest mortgage borrowers can purchase that lowers the amount of interest they will have to pay on subsequent payments. Each discount point generally costs 1% of the total loan amount and depending on the borrower, each point lowers your interest rate by one-eighth to one one-quarter of your interest rate. Discount points are tax deductible only for the year in which they were paid.

Investopedia Says:
For example, on a $200,000 loan, each point would cost $2,000. Assuming the interest rate on the mortgage is 5% and each point lowers the interest rate by 0.25%. Buying 2 points will cost $4,000 and will result in an interest rate of 4.50%.

Both lenders and borrowers gain benefits from discount points. Borrowers gain the benefit of lowered interest payments down the road, but the benefit applies only if the borrower plans on holding onto the mortgage long enough to save money from the decreased interest payments. Lenders benefit by receiving cash upfront instead of waiting for money in the form of interest payments over time, which enhances the lenders liquidity situation.

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Amounts paid to the lender (usually by the seller) at the time of origination of a loan, to account for the difference between the market interest rate and the lower Face Interest Rate of the note; often required when Va Loans are used.

Amounts paid to the lender (usually by the seller) at the time of origination of a loan, to account for the difference between the market interest rate and the lower face rate of the note (the VA and FHA no longer require discount points to be paid by the seller).
Example: At the time of loan application, conventional mortgages are being made at 7%. The maximum rate on an FHA loan is 61⁄2% with 4 discount points added to compensate for the lower rate of interest. If the loan is for $150,000, the points will require an additional payment of $6,000 at closing. (The 4 points equals 4% of $150,000, which is $6,000.)