WHAT ARE DISCOUNT POINTS?

Discount points are fees paid to a lender at closing in order to lower your mortgage interest rate. While buying points is sometimes a good decision, many times the purchase costs you more than it saves.

It is also advisable to contact a tax professional about the deductibility of prepaid interest (also called discount points).

Your mortgage professional can help you evaluate the advantages of paying discount points to reduce your interest rate. An easy calculation to help decide your "break-even" point is listed below.

Total Amount of Discount Points ($) / amount off monthly payment reduction ($) = the number of months required to pay off your prepaid interest.

If you remain in the loan longer than this, you will save money. If you refinance or sell before this point, you will not have recouped your investment.

ex. $2500 in discount / $50 payment reduction = 50 months

If you are in the loan after 50 months you will be saving money interest

along with any discount points you pay you may also pay a higher origination fee because the mortgage broker will no longer be receiving a rebate from the wholesale mortgage lender. discuss the different situations with your mortgage broker and see what one fits your situation and needs the best!

Discount points are not the same as origination fees. An origination fee is charged to complete your mortgage loan. They can be charged as points, but it is a different type of cost.

Buying discount points to lower your mortgage interest rate can be a good idea if you stay in the house longer than your break even point. One discount point costs one percent of the loan amount.

Even if youre unsure of how long you plan to keep your mortgage before you move or refinance, paying points now for a lower rate may make sense. For example, do you have a high-paying job now but you think you might change careers in the next few years? Talk it over with a qualified Mortgage Planner. Its part of a Mortgage Planners job to help you find the right loan for your means and goals.

Sometimes a borrower may not qualify for a mortgage loan because the payment is slightly over the allowed debt to income ratio. In this situation buying down the interest rate and paying discount points may be the best, and may even be your only option in order to qualify for the loan. In this situation it will probably not matter how long you plan on staying in the home because this may be the only way for you to qualify for the home mortgage loan, by paying discount points to get a lower interest rate.

» DISCLAIMER: The information contained in this article on 'WHAT ARE DISCOUNT POINTS?' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.