You spent a lot of time researching mortgages and buying a home only to get a letter from your mortgage company informing you that your mortgage has been sold. You’re understandably confused. How did this happen, and what’s the point? Why go to all the trouble of choosing a mortgage company if it is just […]
What are mortgage discount points?
What are mortgage discount points and how could they benefit you as a buyer?
Discount points can cut interest costs
Mortgage points are fees that a buyer pays the lender upfront to reduce the interest rate of a home loan. This is also called “buying down the rate” where buyers are essentially prepaying interest.
One discount point costs 1% of your mortgage amount (or $1,000 for every $100,000.)
Know your budget and situation before buying points
As always, before making a home purchase or buying points, know your budget and ask yourself these questions:
- Do I have the cash available to buy points upfront?
- What is the interest rate?
- How long do I plan on staying in the home?
How long you plan on staying in the home is important because discount points have what is known a “break-even period” when you will recover the money spent on points. If you don’t plan on being in your home long-term, it is not typically recommended you pay discount points because you may never realize the benefit of your extra investment.
Discount points shouldn’t be confused with lender credits or a temporary buydown
When deciding whether to use discount points, remember that they are not lender credits where you pay higher interest rates to offset closing costs. Nor are they a temporary buydown, where the buyer puts down a deposit upfront to temporarily reduce mortgage interest payments.
Before using discount points to reduce your interest rate, consult with your lender. They will help you determine what makes the most financial sense for you and your unique situation.