November 15, 2023

What are Discount Points?

When you are purchasing or refinancing a home, your lender will quote you an interest rate for your loan. The interest rate will affect your monthly mortgage payment, so it’s an important topic to go over!

After your lender has quoted you a rate, you also have the option to pay discount points. Discount points are fees you can pay in order to get a lower interest rate. The amount of points being charged vary depending on the situation and current market. Discount points are typically more common in a higher interest rate environment.

So, for example, if you’re paying one discount point on a $200,000 loan – you will be paying 1% of $200,000 which is $2,000. These points are added to your closing costs to be collected at the closing table. You will not be charged points upfront.

How do you know if buying a discount point is a good idea?
● You’re planning on staying in the home for a good amount of time
● Calculate your “break-even” point

In order to figure out what your break-even point is, let’s look at the example below:

$200,000 loan amount Initial rate is quoted at 5.5%
You decide to pay 1% discount point which is $2,000 New rate: 5.25%
By paying 1% at closing, you would save $50 on your monthly mortgage payment

Then, take the amount you’re paying for the discount points and divide it by the monthly savings amount:

$2,000/$50 = 40. You will start to recoup the amount you paid for the discount points after 40 months.

Still sound complicated? Good news! Your Advisors Mortgage Loan Officer is fully prepared to educate you and help you evaluate the best situation for you and your family..

By: Jon Iacono
A Family

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