What are Mortgage Discount Points?

Mortgage Discount Points

When buying a home and getting a mortgage you are introducing the largest monthly expense in your budget. To make the payment satisfactory and comfortable, you can reduce the interest rate and hence the monthly payment by paying discount points.

Discount points are an additional fee you pay at time of closing. Typically, paying 1 point which equates to 1% of the mortgage amount you can reduce the interest rate by .25% to .50%. To provide an example, let’s say you have are applying for a $200,000 conventional, 30 year fixed mortgage. The base interest rate your lender provides is 6.5% with zero points. This would make your monthly principal and interest payment of $1264.14. If you paid a point which is 1% of $200,000 or $2000 at closing your interest rate would drop to 6.25% and you reduced principal and interest payment would drop to $1231.43. Think of any discount points you pay as prepaid interest. Points are tax deductible on your personal return but consult your tax advisor on this matter.

The question you want to answer is how long will you be in the home. In the above example the payment reduction was $34 per month. Your breakeven would be $2000/34 or about 59 months. You would have to live in the house almost 5 years to have it begin to make sense. In that 5 years interest rates could rise or fall but if they did fall you would probably refinance the mortgage.

Remember, discount points are not the same as origination points. Origination points are typically fees or revenue being paid to the lender and do not affect the interest rate.

As always, consult with your trusted mortgage advisor to see if paying points make sense for you.