What is a Discount Point?

When it comes to the home buying process it's not only choosing the perfect home but choosing how much you want to finance as well. These decisions are the foundation for your housing expenses for the next 15 - 30 years. Which is why we bring to you a lesson on discount points. What they are, how to use them, and how they can benefit your home loan.

Generally, points and lender credits allow you make tradeoffs in how you pay for your mortgage and closing costs. You can lower your interest rate for an upfront fee at closing by buying points, also known as discount points, . Lender credits lower your closing costs in exchange for accepting a higher interest rate

Typically you pay more money upfront at closing, but by receiving a lower interest rate and in turn a lower mortgage payment, you pay less over time. With interest rates rising quickly, if you're in the financial situation to do so, sometimes a larger upfront investment can save you money in the long run.

How do these points get calculated you might be wondering. Points are calculated in relation to the loan amount. Each point equals one percent of the loan amount. For example, one point on a $100,000 loan would be one percent of the loan amount, or $1,000. Two points would be two percent of the loan amount, or $2,000.

Points don’t have to be round numbers – you can pay 1.375 points ($1,375), 0.5 points ($500) or even 0.125 points ($125). The points are paid at closing and increase your closing costs.

Paying points lowers your interest rate relative to the interest rate you could get with a zero-point loan. In addition will always be listed on your Loan Estimates and and on your Closing Disclosure for your review.

The exact amount that your interest rate is reduced depends on the kind of loan, and the overall mortgage market. Sometimes the reduction in interest rate for each point paid may be smaller or you may receive a relatively large reduction in your interest rate for each point paid. It always depends on the specific lender, loan type, and current market conditions.

A good rule of thumb when buying points, is to make sure your monthly savings by buying these points, add up to the amount it cost to buy the interest rate down, within five years.

https://www.consumerfinance.gov/ask-cfpb/what-are-discount-points-and-lender-credits-and-how-do-they-work-en-136/