What does a discount point do for the borrower?

A discount point is a type of prepaid interest that borrowers can choose to pay at closing to reduce the overall interest rate on their mortgage loan. By purchasing discount points, borrowers essentially pay a percentage of the loan amount upfront, typically equivalent to 1% of the loan for each point, in exchange for a lower interest rate over the life of the loan.

This approach can lead to significant savings on monthly payments and overall interest costs if the borrower stays in the loan long enough to benefit from the lower rate. The decision to purchase discount points can be influenced by how long the borrower plans to stay in the home; the greater the length of time, the better the return on investment when paying for those points due to the reduced monthly payments.

Other choices do not accurately represent the function of discount points. While they do not lower the loan amount or directly require additional fees beyond the upfront cost of the points themselves, their primary purpose is to lower the loan's interest rate, making the correct answer the most relevant in this context.