Mortgage Discount Points Can Lower Your Interest Rate

 You can lower your interest rate with discount points.

No points ban symbolYou’re finally ready to buy a home. You saved up for a down payment, you’ve been approved for a mortgage, and you’re excited to start your search. But then your loan officer tells you about something called “mortgage points” and you’re not quite sure what they are. Do you need to pay them? How do they work? Keep reading to find out everything you need to know about mortgage points on a conventional loan.

What Are Mortgage Points?

Discount points are a type of prepaid interest that you can pay to lower your mortgage rate. One discount point equals one percent of your loan amount. So, if you're taking out a $200,000 mortgage, one discount point would cost you $2,000.

Paying discount points is optional. Whether or not it makes sense to pay them depends on how long you plan on staying in your home and how much money you can afford to pay upfront. If you're planning on staying in your home for a long time and can afford the upfront cost, paying discount points could save you a lot of money over the life of your loan.

How Do Mortgage Points Work?

Discount points graphicIf you're in the process of shopping for a home loan, you may have come across the term "mortgage points." Mortgage points are fees that you can pay to your lender in order to lower your interest rate.

Mortgage points can be a great way for borrowers to save money on their loan, but they're not right for everyone. Before deciding whether or not to buy mortgage points, you should compare the cost of the points to the savings you'll receive over the life of the loan. You should also consider how long you plan on staying in your home. If you're planning on selling your home before you would have paid off the mortgage, you may not recoup the cost of the points.

What is the Breakeven Point?

Each point costs 1% of the total loan amount. So, for example, if you're taking out a $200,000 loan and you're willing to pay 2 points, that would cost you $4,000. The interest rate is reduced approximately 1/4% for each discount point. If you buy two points, your cost would be $4,000 and the points lower your interest rate by 1/2%.

The question then becomes: are mortgage points worth it? The answer depends on how long you plan on staying in your home. If you're only planning on living there for a few years, it probably doesn't make sense to pay the points because you won't recoup the cost through lower monthly payments.

But if you plan on living there for 10 years or more, paying the points could save you a significant amount of money in interest over the life of the loan.

There's no right or wrong answer when it comes to whether or not to pay mortgage points. It's simply a matter of doing the math to see if it makes sense for your particular situation.

How to Calculate Points on a Mortgage

Discount points calculationWhen you're buying or refinancing a home, your mortgage points might help you save money on interest costs. Mortgage points are fees paid to the lender in exchange for a lower interest rate.

Here's an example. Assume the loan is $200,000 with a 4% interest rate. Over a 30-year period, the total interest paid is $143,739.01, with a monthly payment of $954.83. (principal and interest).

Now consider the loan with one discount point. One discount point is equal to one percent of the loan amount ($200,000 X 1% = $2,000), and one point lowers the total interest rate by about 1/4 percent.

If you agree to pay one point in this example, the total interest paid throughout the loan's term would be $133,443.23 and the monthly payment would be $926.23.

How much money would this borrower save if he or she paid one discount point?

Loan Amount Interest Rate Total Interest Monthly Payment
$200,000 4.00% $143,739.01 $954.83
One Point 3.75% $133,443.23 $926.23
Difference 0.25% $10,295.78 28.60 payment reduction

In this example, the borrower pays an extra point ($2,000) at settlement, but saves $10,295.78 in total interest and $28.60 in monthly loan payments.

Discount Points Vs. Origination Points

When shopping for a mortgage, you may come across the terms “origination points” and “mortgage discount points.” These are both fees that can be charged by the lender, and they are sometimes confused with one another. Here’s a quick breakdown of the difference between origination points and mortgage discount points.

Origination points are fees charged by the lender for processing the loan. This fee is typically a percentage of the loan amount, and it covers the cost of things like ordering the credit report, appraisal, and other administrative tasks.

Mortgage discount points are a type of prepaid interest that you can pay to buy down the mortgage interest rate on your loan. Mortgage discount points can be a good option if you plan on staying in your home for a long time, because they can save you money over the life of the loan. The lower interest rate reduces the monthly mortgage payment.

Are Discount Points Considered Closing Costs?

If you're considering a conventional loan to finance your home purchase, you may be wondering if discount points are considered closing costs. Discount points are a type of prepaid interest that can lower your interest rate and monthly payments. Like all closing costs, discount points are paid at closing.

If you're struggling to come up with the cash to pay for discount points and other closing costs, there are a few options available. Many lenders offer no-closing cost loans, which can help keep upfront costs to a minimum. You may also be able to negotiate with the seller to cover some or all of your closing costs. This option is called a seller concession.

Whatever route you decide to take, make sure you understand all of the fees involved in getting a mortgage before committing to anything. With a little research and careful planning, you can find a loan that fits both your needs and your budget.

Are Discount Points Optional?

When it comes to a conventional loan, discount points are technically optional. This is because they’re considered a type of prepaid interest, and as such, you could choose to pay them or not.

However, while you technically have the option of whether or not to pay discount points upfront, there are certain situations where it may make sense to do so. For example, if you have the cash on hand and you want to secure a lower interest rate for the life of your loan, paying discount points could be a good idea.

On the other hand, if you don’t have the cash on hand to pay discount points upfront, or you think you may move before you recoup the costs of paying them, it may not make sense to do so.

Ultimately, whether or not paying discount points makes sense for you will depend on your individual circumstances. If you’re not sure what to do, talking to a mortgage lender can help you weigh your options and make the best decision for your situation.

Are Discount Points Tax Deductible?

Income tax deduction graphicMortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate.

While paying points to get a lower rate may seem like a no-brainer, there's more to the story. For starters, mortgage points are tax deductible. In other words, you can't write them off come tax time.

Moreover, it generally takes several years of owning a home before the savings from a lower interest rate outweigh the upfront cost of paying points. If you're planning on selling your home before that time, chances are you won't recoup the cost of the points you paid.

So while there's nothing wrong with paying points to get a lower interest rate on your mortgage, be sure to do your homework first. Weigh the pros and cons carefully before making a decision. Speak to your tax advisor regarding the deductability of discount points.

Who Pays for the Discount Points?

Who pays graphicWhen you're ready to buy a home, you want to get the best mortgage loan possible. To do that, you may be tempted to pay for discount points. But who actually pays for these points?

Lenders typically offer two types of points: origination points and discount points. Origination points are a fee charged by the lender for processing the loan. Discount points are an optional fee that can be used to buy down the interest rate on the loan.

So, who pays for these discount points? The short answer is that it depends. Sometimes the seller will pay for all or part of the buyer's discount points. Other times, the buyer will pay for all or part of the discount points themselves.

If you're wondering who pays for mortgage points on a conventional loan, here's what you need to know.

Do You Have to Pay Points on a Conventional Loan?

No, you don't have to pay points on a conventional loan, but doing so can lower your interest rate. Mortgage points are a way to pre-pay interest on your loan, and 1 point equals 1% of your loan amount. So, if you're taking out a $200,000 loan and you buy 2 points, you're actually paying $4,000 up front to lower your interest rate. In general, the more points you buy, the lower your interest rate will be.

Does a Conventional Loan Have a Fixed-Rate Mortgage?

Conventional-loan-graphicA conventional loan is a type of mortgage that is not backed by the government. These loans are typically issued by private lenders and they usually have a fixed interest rate. This means that your monthly payments will stay the same for the life of the loan, which can be between 15 and 30-years.

Are Mortgage Discount Points Worth It?

When it comes to a conventional loan, mortgage discount points are simply fees that you pay in order to lower your interest rate.

The question then becomes whether or not paying those points is worth it. The answer depends on how long you plan on staying in the home and how much of a difference it would make in your monthly payments. For example, if you are only planning on staying in the home for a few years, it probably doesn’t make sense to pay the points because you won’t be in the home long enough to benefit from the lower payments.

On the other hand, if you are planning on staying in the home for a longer period of time, paying the points may make sense because it will save you money over the life of the loan. Additionally, if your monthly payments would be significantly lower with the lower interest rate, that could also be a factor in deciding whether or not to pay mortgage discount points.

Ultimately, whether or not paying mortgage discount points makes sense for you depends on your individual circumstances.

You may find that you have to pay points in order to get a mortgage for a property that is affordable given your income and other expenses.

Conclusion

In conclusion, conventional loan points are a way to get a lower interest rate on your mortgage. By paying points, you're essentially prepaying interest on your loan. However, it's important to weigh the costs and benefits of buying points before making a decision. If you're able to stay in your home for a long period of time, paying points could save you money in the long run. But if you plan on moving soon, you may not see much benefit from this investment.