Discount points are one of the most commonly used tools in mortgage financing. They allow you to lower your interest rate, which can save you thousands of dollars over the life of your loan. In this article, we will explore what discount points are, how they work, and what you get by paying them.
Discount points, also known as mortgage points are an upfront fee paid to the lender at closing in exchange for a lower interest rate on the mortgage loan – the cost “discounts” the interest rate. One discount point is 1% of the loan amount and can typically reduce the interest rate by around 0.375%. However, depending on the market sometimes one discount point can reduce the interest rate by more than .375% or less. We can help you weigh the overall interest rate savings vs cost in your exact situation.
Discount points work by lowering the interest rate on your mortgage loan. When you pay discount points, you are essentially prepaying a portion of the interest that would be due over the life of the loan. This reduces the lender’s risk and allows them to offer you a lower interest rate.
For example, let’s say you are taking out a $300,000 mortgage with an interest rate of 4.5%. If you pay one discount point, or $3,000, the interest rate may be reduced to 4.125% or 4.25%. This can save you a lot of money over the life of the loan, as you will be paying less interest over the term. However, if you are planning on refinancing or selling in the near future – it’s important to discuss that with us so we can make sure you will benefit from that up front cost.
By paying discount points, you can get a lower interest rate on your mortgage loan, which saves you a lot of money over the life of the loan. This can be especially beneficial if you plan to stay in your home for a long time, as the savings really add up over the years.
Paying discount points can also help you qualify for a larger loan amount, as it reduces your monthly mortgage payment. This can be particularly helpful if you are on a tight budget, or weren’t able to use some of your income in the qualification process for one reason or another.
In summary, discount points can be a very useful tool in mortgage financing. They allow you to lower your interest rate and save money over the life of your loan. By paying discount points, you can also qualify for a larger loan amount and reduce your monthly mortgage payment. If you are considering paying discount points, it’s important to weigh the cost and your long term plans with the home against the potential savings to determine if it’s the right option for you. As always, if you have questions we can help guide you through this evaluation and make recommendations.