What does one discount point represent in a federal VA or FHA loan?

One discount point represents 1% of the loan amount. This concept is crucial for understanding how discount points function in the context of federal VA or FHA loans. When a borrower pays discount points, they are essentially paying upfront interest, which can lower their monthly mortgage payment.

For example, if a borrower takes out a loan of $200,000, one discount point would cost the borrower $2,000. This payment upfront can result in a lower interest rate on the loan, making the overall borrowing cost less expensive over time.

This structure is designed to provide flexibility for borrowers, allowing them to choose how much they want to pay upfront to potentially save money on monthly payments throughout the life of the loan. Knowing how discount points work is essential for anyone involved in real estate or lending processes, particularly with government-backed loans like those from the VA or FHA where this practice is common.