What Are Discount Points on a Mortgage?

What Are Discount Points on a Mortgage?

Published On: August 18, 2022|Categories: Blog, Buyers, Home Buyers, Mortgages|Tags: , , , , |

What Are Discount Points on a Mortgage?

Mortgage interest rates are at all-time lows, but that doesn’t mean you should just jump on the first rate you’re offered. One way to get a lower interest rate is to pay discount points. But what are they, and are they worth it?

This guide explains what discount points are, how they work, and whether or not they’re worth it for you.

What Are Discount Points on a Mortgage?

Discount points are a way to lower your interest rate by paying upfront costs. Each point is 1 percent of the loan amount. That means on a $300,000 mortgage, one point would cost $3,000.

Paying discount points can lower your interest rate because you’re essentially prepaying some of the interest. The more points you pay, the lower your interest rate will be.

Related: Do you really need a home inspector?

How Do Discount Points Work?

When you’re taking out a mortgage, the interest rate isn’t just set by the market. There are other factors that affect it as well, like your credit score and down payment.

But one way to get a lower interest rate is to pay discount points. The more points you pay, the lower your interest rate will be.

How Do You Buy Discount Points?

Discount points are paid at closing, and they’re usually paid with cash or from your loan amount.

For example, say you’re taking out a $300,000 mortgage with a 4 percent interest rate. You could buy one point for $3,000 and lower your interest rate to 3.5 percent.

Or you could buy two points for $6,000 and lower your interest rate to 3 percent.

Should You Buy Discount Points?

Discount points are a way to lower your interest rate, but they’re not for everyone.

Before you decide whether or not to buy discount points, you should consider how long you plan on staying in your home. If you’re only planning on staying in your home for a few years, it might not make sense to buy discount points because you won’t save enough in interest to outweigh the upfront costs.

However, if you’re planning on staying in your home for 10 years or more, buying discount points could save you thousands of dollars in interest over the life of your loan.

You should also consider your financial situation. If you have the cash on hand to pay for discount points, it might make sense to do so. But if you’re tight on cash, it might not be worth it to pay the upfront costs.

Ultimately, whether or not to buy discount points is a personal decision. You should weigh the pros and cons and decide what’s best for you.

Related: What’s the difference between a fixed-rate mortgage and an ARM?

Discount points are a way to lower your interest rate by paying upfront costs. They’re not for everyone, but if you’re planning on staying in your home for a long time, they could save you thousands of dollars in interest.

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