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
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.