What are discount points?

What are discount points? - Discount points are fees paid to the lender at closing. Most times they are paid for a lower interest rate. One point is equal to 1% of the total loan amount. As an example, a $150,000 loan, one point would equal $1500. Most lenders charge between 1 and 2 points for a lower rate.

Many homebuyers will ask the seller to pay a discount point for them. That is a great way to have the seller assist you in getting a below market interest rate on your purchase.

Discount points are Tax deductible, while Origination point are not usually Tax deductible.

Discount points are paid by a borrower to obtain a lower rate on their mortgage. Discount points are generally only recommended when you plan on staying in your current mortgage for many years. Sometimes discount points may be necessary to lower the rate on your mortgage so that you meet a lender's DTI (Debt to income Ratio) guidelines.

When considering how many discount points you should pay to lower your rate, have your mortgage professional calculate the Break Even point for each option. The break-even point is the amount of time it will take for your monthly savings to add up to the cost of each additional discount point.

Discount Points are also referred to as "Prepaid Interest". You are paying your interest upfront at closing, rather then over the lifetime of the loan. If you are planning in staying in your home for a long period of time, then paying discount points up front may benefit you in the long run. Consult your mortgage professional to see if paying discount points are right for you.

Should You Pay Points on Your Loan? - With interest rates on the rise, paying points has become more common for borrowers who need to get the lowest payment possible.

Paying points makes sense when you're going to be in your loan for four or more years. The strategy is to stay in your loan longer than your break-even point.

Many uneducated borrowers will mistakingly believe that points are a bad thing that should be avoided. Often, this myth is perpetuated when these borrowers warn their family, friends, and coworkers to 'stay away' from paying points. The fact is, paying points can be a very smart financial decision. It will allow you to 'buy down' your interest rate, which will lower your monthly payments. By paying more up front, you will save money each month.