When Does It Make Sense to Buy Mortgage Discount Points?
When you are getting a mortgage, you will spend a lot of time thinking about your mortgage payment and your interest rate. Your interest rate will determine how much you pay monthly. If your goal is to have a lower monthly payment and/or pay less over the life of your loan, mortgage discount points may help you.
Interest rates are not one-size-fits-all and can be determined by many factors. However, we will make every effort to get you the best rate for your loan.
Did you know you can get a lower interest rate by buying discount points?
What are discount points?
A discount point gives you the ability to buy a lower interest rate by pre-paying some of your loan’s interest. Each point will lower your interest rate by a fraction of a percentage.
Because interest is calculated based on a specific number of months that you will be making payments, reducing your interest rate by pre-paying interest may be a good idea if you are planning on keeping your mortgage for several years.
How could points help you?
Here is an example:
Let us say that your mortgage loan officer can reduce your interest rate by .25% for each point you buy, and they will allow you to buy up to 3 points. They advise you that each point costs 1% of your loan amount. Your lender will establish the maximum number of points you can purchase.
Note that this scenario is just an example – the amount of rate reduction will vary from borrower to borrower. Confirm with your loan officer to determine how this example applies to your financial situation.
If you qualify for a $250,000 loan with a 360-month term, and you were offered an interest rate of 4%, the monthly principal and interest payment would be approximately $1,194.00.
Monthly savings
If you purchase one discount point, you can reduce your interest rate to 3.75%. Your principal and interest payment would be $1,158 per month. You will pay $2,500 upfront for the discount point and receive a $36 savings per month in interest for the life of your loan.
Is it worth it?
When deciding on discount points, take into consideration how long you plan on having the mortgage.
To decide if it is worth it to pay $2,500 to save $36.00 per month, you need to figure out your goal for the mortgage. Are you going to move and sell the house in a few years? Are you thinking of refinancing in a few years? Or do you planning on keeping the mortgage for several years?
You would need to make 70 mortgage payments (5.83 years) to recoup the $2,500. If you sell or refinance before that point, you will not see the benefit of your points purchase. In this case, it would be better for you to skip the discount point purchase at the beginning. However, if your goal is to stay in your home (without refinancing) beyond 6 years, the initial purchase is worth it.
Can you afford it?
Because you will pay for the discount points at the beginning of your loan, you need to consider that you need available funds to pay the cost of the point(s) plus your down payment, plus any closing costs and fees that are not paid by the seller. You may be able to negotiate a contribution from the seller towards your discount points when writing your sales contract. Talk to your real estate agent about the best way to do that.
What if mortgage discount points are not in my budget?
If you cannot afford the payment of discount points, you may be able to lower your mortgage payment and/or interest paid on the loan by refinancing. Discuss all your options with your loan officer. They will help you decide the best option for you.
When you’re ready, we can help you decide if discount points are a good choice for lowering your interest rate. Please contact a loan officer today.
