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If you are considering purchasing a home, it is likely that you may have heard the term discount points. It is also likely that you might not fully understand what they are, how they are used, or if they are right for you. Michelle Schmidt from Movement Mortgage has provided information to help you better understand. Keep reading for discount points explained.
Discount points, also known as mortgage points or simply points, are a type of prepaid interest that borrowers can purchase to lower the interest rate on their subsequent monthly payments. In simpler terms, it’s like spending more upfront to pay less over the term of your mortgage.
Here’s how it works:
- Each point typically costs 1% of the total loan amount. So, for a $400,000 loan, one point would cost $4,000.
- Paying for points reduces the interest rate on your loan. For example, paying one point on a $400,000 loan with a 6.75% interest rate might lower the rate to 6.25% a saving of $156 per month. The $4000 upfront cost divided by the saving of $156 would take approx. 26 months to recoup the initial expense.
- The lower interest rate translates to lower monthly payments. Over the life of the loan, you could save thousands of dollars in interest.
Here are some things to keep in mind about discount points:
- They are not always a good deal. It only makes sense to buy points if you plan on keeping your loan for an extended period of time. Otherwise, you may not recoup the upfront cost of the points in lower interest payments. You can also negotiate with the seller to pay your points and or closing costs.
- You can’t deduct discount points from your taxes unless you itemize your deductions.
These are additional resources that you may find helpful:
- NerdWallet: https://www.nerdwallet.com/article/mortgages/discount-points
- Consumer Financial Protection Bureau: https://www.consumerfinance.gov/consumer-tools/mortgages/
It is important to connect with a trusted lender and realtor that can help you determine if discount points are right for you. They will take into consideration your unique financial situation and your goals to develop the ideal approach. If you are not currently working with a realtor, connect with us.
