What Discount Points Can Do For You

You have probably heard the discount point buzz that is popular among home buyers and mortgage borrowers these days. For some first-time home buyers it is a topic of interest because it is not extremely familiar. For second or third-time buyers, discount points are old news but still worth attention.

The reason that discount points will never cause a dead discussion is that they are one major way of lowering your interest rate! You are in control of how many discount points you pay, so you are in control of how much you lower your rate.

A discount point is equivalent to one percent of the loan amount. For example, a $90,000 loan would make one discount point $900, two discount points would be $1,800, and so on. This may sound like a lot, but remember that once you get these payments taken care of upfront, you won’t have to worry about them later on and you will have lower interest for the life of your loan. This is not to say discount points are easy to pay, and they are usually only a wise investment for those who plan on staying in their home for at least ten years and sometimes much longer.

If you want to do the math, it may help you get a clear idea of how much it would cost and how much it would save you. First calculate the monthly fee with the original interest rate without adding in the discount points. Next, calculate the monthly payment with the points. Subtract the second calculation from the first, and this is how much you can save each month. Then divide the cost of the discount points at closing by the monthly amount you would save. The result you find should be the number of months you must keep the loan in order to break even in the long run. Note: The total amount will equal that if you had not purchased discount points.

As an example, if you have a $100,000 loan for a thirty year term and pay 7.5 percent interest with no points, you will pay around $699.21 each month. However, if you pay 7.5 percent interest each month with one point at $1,000, your monthly payment will go down to $690.68 each month.

With this example you would be saving $8.53 each month, and if you divide the $1000 (the discount point you paid) by $8.53 (your monthly amount saved) you will break even in 117 months. What this indicates is that you would need to keep your home for over ten years to save from your purchased discount points at the time when you closed on the home.

Some home buyers ask if the seller can purchase the discount points. The answer is probably. It depends on your loan and your mortgage company. Talk with your lender and see what is allowed. If the seller does pay discount points, he or she will probably ask for a higher sales price.

One more advantage of discount points is that they are tax deductible. Remember that these points are completely optional to benefit you, and that they are separate from the origination fee which is mandatory, and charged by the lender to process your loan.