What Are Mortgage Discount Points?

What are discount points and will they save you money?

No points ban symbolYou’re about to close on your new home and your loan officer has presented you with the option of paying discount points. It sounds like a no-brainer – pay a little bit now to save a lot later, right? But as with most things in life, there’s no such thing as a free lunch. In this article, we’ll explore the pros and cons of paying discount points so that you can make an informed decision on whether or not it’s worth it for you.

What Are Discount Points on Mortgage?

When you shop for a mortgage, you may come across the term "points." Mortgage points are fees paid to the lender at closing in exchange for a lower interest rate on your loan. One point equals 1% of your loan amount.

So, if you're taking out a $200,000 loan, one point would cost you $2,000. Mortgage points can help you save money over the life of your loan, but they're not for everyone. Here's what you need to know about mortgage points before you make a decision.

When do mortgage points make sense?

Mortgage points make the most sense if you plan on staying in your home for a long time. The longer you keep your mortgage, the more interest you'll pay overall. By paying points up front, you're essentially prepaying some of that interest, which can save you money in the long run.

For example, let's say you have a 30-year fixed-rate mortgage with an interest rate of 4.5%. If you don't pay any points, your monthly payment will be $1,013. But if you pay 1 point upfront ($2,000), your interest rate will drop to 4%,

How Do Discount Points Work on a Mortgage?

When you're shopping for a mortgage, you may come across the option to buy mortgage points. One point equals 1% of your loan amount, and buying points can lower your interest rate. It's important to understand how mortgage points work before making a decision on whether or not to buy them.

Mortgage points are paid at closing, and they can either be paid by the borrower, seller or the lender. If you're paying for points, each point will cost you 1% of your loan amount.

On a $200,000 loan, for example, one point would cost you $2,000. Paying for points may decrease your interest rate since lenders consider borrowers willing to pay for points to be less risky.

The lower your interest rate, the less interest you'll pay throughout the life of your loan. Use our extra payment calculator and see for yourself.

That is why, if you want to remain in your house for an extended period of time, paying for points may be a smart option.

On the other hand, if you think there's a chance you may sell your home before you've built up enough equity to offset the cost of the points, then paying for them may not be worth it.

You can also choose to have the seller pay for points

How Much Does One Discount Point Reduce the Rate?

When you're considering whether or not to pay discount points on your mortgage, it's important to know how much each point can reduce your interest rate.

On average, each mortgage point reduces your interest rate by 0.25%. So, if you're paying 1 point on a $200,000 loan with a 4.5% interest rate, you're essentially paying $2,000 to reduce your interest rate by 0.25%.

Of course, whether or not this is worth it depends on how long you plan on staying in your home. If you're only planning on staying in your home for a few years, it probably doesn't make sense to pay the extra money for the reduced interest rate. However, if you're planning on staying in your home for 10 years or more, paying discount points could save you thousands of dollars over the life of your loan.

Ultimately, whether or not paying discount points is worth it depends on your personal situation. If you have the extra cash and you're planning on staying in your home for a long time, it might be worth paying the points. However, if you're tight on cash and/or you're not planning on staying in your home for very long, it

What is the Breakeven Point?

The breakeven point is the point at which the total cost of paying discount points equals the savings from refinancing. The savings from refinancing are the difference between the old interest rate and the new, lower interest rate. The total cost of paying discount points includes the upfront cost of the points as well as any fees associated with refinancing.

How much would this borrower save by paying one discount point?

Loan Amount Interest Rate Total Interest Monthly Payment
$100,000 4.00% $71,869.51 $477.42
One Point 3.75% $66,721.61 $463.12
Difference 0.25% $5,147.90 $14.30

From this example, the borrower pays an additional point ($1,000) at settlement, but reduces the total amount of interest by $5,147.90 and lowers the monthly loan payment by $14.30.


Should I Buy Mortgage Points?

The answer to this question depends on a number of factors, such as your financial goals, how long you plan on staying in the home, and your tolerance for risk. Ultimately, only you can decide if buying points makes sense for your situation.

That said, there are a few general guidelines that can help you make your decision. First, buying points can be a good way to lower your interest rate and monthly payments if you plan on staying in the home for a long time. This is because the upfront cost of the points is offset by the savings you'll enjoy over the life of the loan.

On the other hand, if you're not planning on staying in the home for very long, or if you're comfortable with a higher interest rate, then paying points may not make sense. This is because it can take several years to recoup the upfront cost of the points through lower monthly payments.

Ultimately, whether or not paying points makes sense for you will come down to your specific financial goals and circumstances. But these general guidelines can help you make an informed decision.

Are Discount Points Worth It?

Man holding a discount points signThe debate over whether or not discount points are worth it is a long-standing one in the world of real estate. There are pros and cons to paying discount points, and ultimately it comes down to what makes the most financial sense for the borrower.

On the pro side, paying discount points can lower your interest rate, which saves you money over the life of your loan. It can also help you qualify for a lower monthly payment. On the con side, discount points are an upfront cost that must be paid in cash or added to your loan balance.

So, are discount points worth it? The answer may vary depending on your individual circumstances. If you plan on staying in your home for a long time and can afford the upfront cost, paying discount points could be a wise decision. However, if you're only planning on staying in your home for a few years or are tight on cash, it may be better to forego the discount points.

Can You Negotiate Points on a Mortgage?

If you're considering paying discount points to lower your interest rate on a mortgage, you may be wondering if you can negotiate the points with your lender. The answer is maybe.

While some lenders require that you pay a certain number of points, others may be willing to negotiate. It's always worth asking if your lender is willing to budge on the number of points you'll need to pay.

Keep in mind that each point costs 1% of the loan amount, so paying two points on a $200,000 loan would cost $4,000. So before you start negotiating, make sure that paying the points will actually save you money in the long run.

If you're not sure whether or not paying points makes financial sense for you, consider talking to a financial advisor. They can help crunch the numbers and give you some peace of mind as you move forward with your mortgage.

What are Origination Points?

The origination fee (point) is charged to the home buyer for processing the mortgage application, as well as underwriting and funding the loan, as well as other administrative services. The cost for the origination fee is usually 1% of the loan amount.

Rotating question markFrequently Asked Questions (FAQs)

Q. Is it possible to roll points into my refinance?
A. Points can be rolled into the new loan with most refinance loans, however, keep in mind that by including the mortgage points into the new loan, you are increasing the loan balance.

Q. Is it necessary for you to pay mortgage points out of pocket?
A. On purchase transactions, discount points are usually paid by the buyer however, the discount points may be paid by the seller, provided the cost of the points meet the seller paid closing cost limits.

Q. How are loan discount points calculated?
A. Multiply the loan amount by the discount point percentage.

Q. How many discount points can you buy?
A. Lenders will offer three discount points. Beyond three points, the savings begins to fall off. 

Read more about USDA loans with our questions and answers page

Conclusion

In conclusion, by understanding the concept of discount points and their impact on your mortgage payment, you can save yourself a lot of money in the long run. By taking advantage of this government-backed loan program, you can get into the home of your dreams while keeping your monthly payments low. So don't wait any longer; call your lender today to learn more about USDA loans and how you can take advantage of them.