Discount Points and Your Mortgage

It can feel like you need to learn a whole new language when applying for a mortgage. Terms like APR, origination fee, and debt-to-income ratio are thrown around, and most of it sounds like a foreign concept. One mortgage component that can cost or save you thousands of dollars is the discount point.

What is a Discount Point?

A discount point is a prepaid fee that the borrower pays at the time of closing in exchange for a lower interest rate. It can also be referred to as buying down the rate. Mortgage companies use discount points as a way for homeowners to get a lower interest rate, and therefore a lower mortgage payment. For example, let’s say the current standard interest rate on a loan is 4% and the buyer, getting a $300,000 loan, wants to see if they can get a lower interest rate by buying down the mortgage to get to a lower rate. The following chart shows discount point (a percentage point) on that $300,000 mortgage that the lender may offer:

When Are Discount Points Worth It?

It may not always be in your favor to use discount points to buy down your interest rate. The chart below illustrates the different discount points on a $300,000 mortgage, the monthly payment amount and the break-even point.

 How to Pick the Right Discount Point for Your Home Purchase

Speak with your mortgage professional about what discount point options they offer on their loans. Different mortgage providers will charge varying amounts for discount points, so it may be worth it to shop around for who has the most competitive rates and points. Lastly, figure out what the break-even point would be on your mortgage and determine whether or not you will be in the home long enough to break even and save money in the long term.