Mortgage Loans and Discount Points

This  is a fee that is part of the price of a loan.  Discount Points are paid, as additional closing costs, in order to lower the overall interest rate and mortgage payment. 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 1% of the loan amount, or $1,000. Two points would be 2% of the loan amount, or $2,000.

Each point should reduce your interest rate buy about .25%.  For instance, if the interest rate is 5.00%,  You may be able to get a loan at 4.75% if you pay a discount point.

This fee is added to the standard closing costs and therefore will increase the cash needed to bring to closing. 

So how do you determine if you should pay points to lower the rate?  

The question is will the additional costs paid at closing save you money over time?

Paying discount points to buy down the mortgage interest rate is a good idea if you plan to stay in the home for a long period of time.  

Let's look at an example:

Let's say you are going to borrower $350,000.00  If the interst rate with no discount points is 5.00% on a 30 year mortgage your principal and interest  payment will be $1878.88.  But if you could pay 1 point or 1% of the loan amount to lower the rate to 4.75% your payment would be $1825.77, saving you $53.11 each month.  

Well that $53.11 savings cost you 1% or or $3,500.   By dividing the cost, in this case $3,500, by the savings of $53.11 you will arrive at howmany months it will take before you break even.  Every payment after that you are $53.11 ahead.

In this case it would take 66 months or about 5.5 years.   If you plan on staying in this home more than 5.5 years, YES YOU SHOULD PAY POINTS!             

Every payment after that you are $53.11 ahead!!!

Often the seller will agree to pay some amount of points or closing costs on your behalf.  Let that seller credit pay points rather than the other closing costs if possible.

Like a discount point, this is a fee, calculated as a percent of the mortgage  amount.  It is charged by a mortgage lender to cover certain processing expenses in originating the mortgage or home loan. 

Unlike a discount point, origination points do not affect your interest rate.

There are a plethora of costs associated with buying a new home and getting a mortgage or home loan.