Discount points or mortgage points are fees borrowers pay directly to their lenders at the closing time for reduced interest rates.
The discount points help borrowers to save money over the course of the mortgage lifetime. These points can be assumed as an upfront payment of the interest rate. Your interest gets adjusted based on how many points you gave your lender.
How much is one discount point worth?
Your monthly mortgage payment will be lower if you use discount points. In the end, you will save money. One discount point will cost you a total of 1% of your total mortgage.
For example, let us assume that you have a $300,000 mortgage. In this case, one mortgage point will be 1% of $300,000 which is $3,000. Should you want 2 mortgage points? You will pay 2% of your total mortgage or $6,000. For 3 points, you will pay 3% of $300,000 or $9,000.
I think you got the idea. Why would you want to give your lender that much money? You will be buying down the mortgage rate which will save you a lot of money throughout the mortgage lifetime. If your interest rate was 5%, you could buy it down to 4% for example by using discount points.
This means that you will be saving a 1% on interest rate since your negotiated rate is 4% instead of 5%. This 1% you are saving will become a huge number after 30 years.
Benefits of using discount points
- Buying down your mortgage rate will reduce your interest rate payments. For example, if your fixed-rate mortgage rate was 4.5% for over 30 years; you could bring it down to 3.8% by using discount points.
- By reducing your interest rate, you will have less monthly mortgage payments
- You will save a lot of money on the interest charges
- The money paid for discount points could be tax deductible in some cases
Cons of discount points
The biggest con is a higher price you pay for points. Many home buyers are financially exhausted after the down payment and closing costs. Having to pay 1% of the total percentage of the mortgage for 1 point can be hard for many people. The more points you give your lender, the more money you save. So, it is expensive to buy many points.
