What are Discount Points?
Buying a house is a huge purchase and many buyers look for ways to reduce their costs as much as possible. Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can lower monthly mortgage payments.
One point costs 1% of the mortgage amount, or $1,000 for every $100,000. Essentially, there is some interest paid up-front in exchange for a lower interest rate over the life of the loan.
Each point typically lowers the rate by 0.25%, so one point would lower a mortgage rate of 4% to 3.75% for the life of the loan. How much each point lowers the rate varies among lenders, however. The rate-reducing power of mortgage points also depends on the type of mortgage loan and the overall interest rate environment.
In general, the longer the borrower plans to own the home, the more points help them save on interest over the life of the loan. Running the numbers is imperative when it comes to considering the utilization of points.
Are discount points right for you?
It’s important to consider how long it takes to recoup the cost of buying points. This is called the break-even point. To figure this out, divide the cost of the points by how much money is saved on the monthly payment.
The resulting number is how long it takes for the monthly payment savings to equal the cost of the points. If the borrower plans to be in the home for at least this amount of time, points may be worth exploring if a higher upfront cost is available to be made.
If you end up selling the home or refinancing the loan prior to the break-even point, paying the point(s) will have cost you more than if you had not paid for them.
If you are looking into purchasing a home and have questions about mortgage points, or any other savvy way to score lower payments, please feel free to reach out to us at (760) 930-0569 and one of our loan officers will assist you.