Understanding Bona Fide Discount Points in Pennsylvania: Insights from Alston & Bird

Pennsylvania Overhauls Mortgage Lending Rules, allowing ‘Discount Points’

Harrisburg, PA – August 22, 2025 – Pennsylvania has enacted notable changes to its mortgage lending regulations, paving the way for lenders to offer discount points to borrowers. House Bill 1103, signed into law, modifies the stateS usury code and the Mortgage Licensing Act, becoming effective August 29, 2026.

What Are Discount Points and Why Do They Matter?

Discount points are fees paid upfront by borrowers in exchange for a reduced interest rate on thier mortgage. This new legislation directly addresses the previous restrictions on these points, bringing Pennsylvania in line with most other states. For years, Pennsylvania’s law limited the collection of discount points, particularly those paid by the seller, on non-government-backed mortgages.

Key Changes in the Law

The amendment repeals the existing definition of discount points and removes a section prohibiting lenders from collecting them from sellers.The revised mortgage Licensing Act now explicitly permits licensed lenders to offer discount points, defining them as “fees knowingly paid by the consumer for the purpose of reducing, and which result in a bona fide reduction of, the interest rate or time-price differential applicable to the mortgage.” This change applies to both first and second mortgage loans, nonetheless of the loan amount.

According to legislative records, the primary goal of these amendments is to empower borrowers to lower their interest rates and align Pennsylvania’s regulations with the majority of states that do not restrict the charging of discount points. Previous restrictions were criticized as being overly narrow and perhaps conflicting with federal regulations such as the Depository Institutions Deregulation and Monetary Control Act.

The “Bona fide” Reduction Requirement

A crucial aspect of the new law is the requirement that any discount points charged must result in a “bona fide” reduction in the interest rate. While the statute doesn’t specifically define “bona fide,” it has prompted scrutiny. The federal Truth in Lending Act (TILA) offers some guidance, defining a bona fide discount point as 1% of the loan amount that demonstrably lowers the rate, consistent with standard industry practices.

state regulators have informally indicated that any actual reduction in the interest rate will likely be considered “bona fide.” However, without official guidelines, uncertainty remains. As of late 2024, the average 30-year fixed mortgage rate hovered around 7.79%, according to Freddie Mac data. Freddie Mac.

Here’s a quick comparison:

Feature	Previous Law	New Law (Effective Aug 29, 2026)
Discount Points Definition	Defined and Restricted	Defined, Permitted with Conditions
Points Paid by Seller	Prohibited	permitted
Applicability	Limited to Specific Cases	All First & Second Mortgages
“Bona Fide” Reduction	Not Applicable	Required

Did You Know? the usury law previously applied only to residential mortgage loans with a principal amount of $319,777 or less, a figure that adjusts annually for inflation.

What This Means for Lenders and Borrowers

Licensed mortgage lenders should meticulously ensure that any discount points charged adhere to the Pennsylvania Department of Banking’s interpretation of “bona fide” and demonstrably reduce the interest rate. Violations of the Mortgage Licensing act carry potential fines of up to $10,000 per offense. Borrowers should carefully review all loan terms and understand how discount points will affect their overall cost of borrowing.

Pro Tip: When comparing mortgage offers, don’t just focus on the interest rate. Consider the total cost of the loan, including any discount points and other fees.

Will these changes lead to increased home affordability in Pennsylvania? What impact will clarified guidelines regarding “bona fide” reductions have on the mortgage market?

Understanding Mortgage Discount Points

Mortgage discount points, also known as ‘buying down the rate,’ are a financial strategy used by borrowers to secure a lower interest rate on their home loan. One point generally equals one percent of the loan amount. For example, on a $300,000 mortgage, one point would cost $3,000. while this adds to the upfront costs,it can result in significant savings over the life of the loan. Though, it is indeed crucial to calculate the ‘break-even point’ – the time it takes for the savings from the lower rate to offset the cost of the points.

Frequently Asked Questions About Pennsylvania’s New mortgage Law

What are discount points on a mortgage?

Discount points are fees borrowers pay upfront to lower their interest rate. Each point typically costs 1% of the loan amount.

What does ‘bona fide’ mean in relation to discount points?

“Bona fide” means the discount points must result in a genuine, measurable reduction in the interest rate, based on established industry standards.

how does this law impact Pennsylvania borrowers?

Borrowers now have more options to lower their interest rates by paying discount points, which was previously restricted in many cases.

What are the potential penalties for lenders violating this law?

Lenders who violate the Mortgage Licensing Act could face fines of up to $10,000 per offense.

Where can I find more information about mortgage rates?

Reliable sources for current mortgage rates include Freddie Mac and Bankrate.

Share this article with anyone considering a mortgage in pennsylvania! Let us know your thoughts in the comments below.

Are there specific Pennsylvania state laws that differ from federal regulations regarding the deductibility of bona fide discount points?

What are Bona Fide Discount Points?

Bona fide discount points, frequently enough simply called “points,” are prepaid interest charged by a lender on a mortgage loan in Pennsylvania. Essentially, you’re paying upfront for a lower interest rate over the life of the loan. One point equals 1% of the loan amount. These points are tax-deductible in many cases, making them an attractive option for some borrowers. Understanding these points is crucial when navigating Pennsylvania’s mortgage landscape.

Pennsylvania Specific Regulations & Real Estate Finance

Pennsylvania adheres to federal regulations regarding mortgage lending, but also has specific state laws impacting real estate finance. This includes scrutiny of lender fees, ensuring transparency in mortgage disclosures, and protecting borrowers from predatory lending practices.Alston & Bird’s expertise in financial regulatory law is particularly relevant here, as they frequently advise lenders on compliance with both federal and state regulations concerning discount points.

How Discount Points Work: A Detailed Breakdown

Let’s illustrate with an example. Imagine you’re taking out a $300,000 mortgage.

Without Points: A 6.5% interest rate.

With One Point: Paying $3,000 upfront (1% of $300,000) to reduce the interest rate to 6.25%.

With Two Points: Paying $6,000 upfront (2% of $300,000) to possibly lower the interest rate further,perhaps to 6.0%.

The key is to calculate the break-even point – how long it will take for the savings from the lower interest rate to offset the upfront cost of the points. This calculation depends on how long you plan to stay in the home.

The Role of Alston & Bird in Mortgage Law

Alston & Bird is a leading law firm with a critically important practice in financial services and real estate law. Their insights are valuable because they represent both lenders and borrowers, providing a extensive understanding of the legal complexities surrounding mortgage transactions. They’ve been involved in cases concerning Truth in Lending Act (TILA) compliance, RESPA (Real Estate Settlement Procedures Act) regulations, and the enforceability of mortgage contracts – all areas directly impacting discount points. Their analyses frequently enough focus on ensuring points are legitimately “bona fide” and not disguised fees.

Distinguishing Bona Fide Points from Illegal Fees

Not all upfront fees are legitimate discount points. Pennsylvania law, mirroring federal regulations, prohibits lenders from charging excessive or hidden fees.

Here’s what differentiates bona fide points:

transparency: clearly disclosed on the Loan Estimate and Closing Disclosure.

Voluntary: You, the borrower, have the option to pay points or not.

Direct Correlation: A clear relationship between the points paid and a reduction in the interest rate.

Substantive Benefit: The reduction in the interest rate provides a genuine financial benefit to the borrower.

Alston & Bird has frequently advised clients on identifying and challenging fees that don’t meet these criteria.

Tax Implications of Discount Points in PA

Generally, bona fide discount points are tax-deductible in the year you pay them, if you meet certain requirements.These include:

the loan must be secured by your main home.

You must itemize deductions on your tax return.

The points must be an amount customary in your area.

Consult with a qualified tax professional for personalized advice, as tax laws are subject to change. IRS Publication 936 provides detailed guidance on home mortgage interest deduction, including discount points.

Calculating Your Break-Even Point

Determining whether paying points is worthwhile requires a simple calculation:

1. Calculate Annual Savings: (Original Interest Rate – New Interest Rate) Loan Amount
2. Divide Total Point Cost by Annual Savings: This result is the number of years it will take to break even.

For example, if paying $3,000 in points saves you $900 per year, your break-even point is 3.33 years. If you plan to stay in the home longer then that, paying points is likely a good investment.

Common scenarios & Considerations

Refinancing: Discount points can be particularly beneficial when refinancing a mortgage, especially if you anticipate staying in the home for a long period.

* First-Time homebuyers: Carefully evaluate whether the upfront cost of