Smart borrowers are looking for ways to maximize their buying power by lowering their interest rates as much as possible. While we know that each of our buyer will have different needs, the best possible interest rate seems to be one common priority for most people. One way to secure a more favorable rate is by buying discount points. Here’s what you need to know about some of the FAQs we hear about discount points to help you decide if they are the right solution for you.
What are Discount Points?
Discount points are optional fees you can pay upfront at closing in exchange for a lower interest rate on your mortgage. Think of it as prepaying part of your interest to get a better rate. Let’s say you’re quoted a 7% interest rate on a $400,000 mortgage, but buying 2 points lowers your rate to 6.5%. That could reduce your monthly payment by about $130–$150, depending on your loan term. Over 10 years, that would mean over$15,000 in savings (far more than the upfront cost of the points).
How Much Do Discount Points Cost?
Discount points typically cost 1% of your loan amount, so the cost is going to differ depending on how much you borrow.
The cost is based on your loan amount. Here’s a simple example:
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Loan amount: $400,000
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1 discount point = $4,000
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2 discount points = $8,000
You pay this one-time fee when you close on your home, so there is no ongoing cost to you.
How Many Discount Points Can I Buy?
This will vary from lender to lender, and according to market conditions. If you want specific answers in your current scenario, just talk with one of our loan officers to get more information!
Are Discount Points Worth It?
The short answer is yes, maybe. It depends on your plans. For borrowers who don’t plan to own the property for long enough to reach the “break even” point, it won’t be worth it. For those who own the home past that point, the savings will only compound over time and be well worth that upfront investment.
The break even point is calculated as the point when your monthly savings have now surpassed that initial cost at closing. So, let’s say you are saving $200 per month because you bought 2 discount points for $8,000. After 40 months, or just over 3 and a half years, you’re just pocketing that money each month. However, if you sell before that 40 month mark you won’t have actually saved money.
If you want to know whether discount points are worth it for you, simply calculate that break even point and consider whether you will likely still own the property at that point. If the answer is yes, then the discount points are probably worth it for you!
When you are ready to apply for a loan, or if you just want to talk to an expert to begin pursuing the right financing solution for your unique scenario, we are here to help. We specialize in getting you a loan that is just the right fit, whether you have a typical application, you’re a self-employed borrower, or you have some unique hurdles to overcome. Contact us any time to find out what we can do for you.