What are Discount Points?

Home Loan Discount Points

When buying a home, you might come across the option to add points onto your mortgage loan. But what does that point mean? Are discount points worth it?

What is a Discount Point?

A mortgage discount point occurs when you opt to get a lower interest rate on your loan. This, in turn, gives you the opportunity to save money on your home purchase over time. But you would also have to spend extra on the home at the start. You have to decide to save money now or later. Here’s an example of how this would work as you get your mortgage loan prepared:

  1. First, you would opt to have a point, or two added to your home purchase. Each point is worth 1 percent of your mortgage loan total.
  2. You would then spend that certain percentage on your loan to get the point. If you were to but a $150,000 home, you would pay $1,500 on a single mortgage point.
  3. The money you are spending would go towards the interest on your mortgage. For the above example, the $1,500 would work not on the $150,000 principal but whatever the expected value of interest on your home would be.
  4. As you pay off that interest, the rate would effectively decrease. The decline would vary based on how much interest you are paying off and what the initially anticipated interest total on your loan was.

This simple process is useful as it reduces your interest rate by a small bit. You might get the total down by one-eighth or more of a percentage point depending on what you are doing with the loan. There are many positives of getting mortgage points to see before you make your loan official:

  • You will pay less money each month on your loan because of the reduced interest rate.
  • It should be easier for you to cover your payments as you will be less likely to struggle with paying off your loan.
  • You may also improve upon your credit rating, what with you showing your general commitment to getting your home paid off.

But even with those positives, you should only buy mortgage points when you are capable of paying more money in the closing process. You would have to spend 2 to 5 percent of the value of your loan in the closing process. Points would only add to the total that you would pay. Plan on Staying in Your Home for Many Years? Also, you should only consider points if you plan on living in your house for an extended period of time. This includes getting points if you are going to live in that property for the next ten or twenty years or so forth. Take a look at how mortgage points can work if you are interested in lower payments. This can save you $1,000’s over the life of the loan. Good luck with your home purchase or refinance. Let us know if you chose to leverage discount points.

Understand Loan Points & Origination Fees