Discount Points vs. Rebate Points

Q. Can you explain the difference between a discount point and a rebate point?

A.  A discount point (1% of the loan amount) is the amount that a borrower pays a lender to buy the interest rate or margin down below the par or wholesale price on a loan.  A rebate point is more or less the opposite.  It is the amount above the wholesale price that the lender credits the borrower.  Rebate pricing results in a slightly higher interest rates or margins and allows brokers to provide, in many cases, zero point loans.  Note:  both discount and rebate points do not change the interest rate or margins on a 1:1 basis.  In other words, if one pays a point $4,000 on a $400,000 loan to buy the interest rate or margin down it will not be reduced a full point. Typically, paying a point would reduce the interest rate or margin to 1/3 of a percent.  Similarly, a rebate of 1 point paid to a broker would result in a point upward adjustment to the rate or margin. 

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