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.

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.

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

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.

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.

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.

If you pay discount points to recieve a lower rate you will also pay origination fees to your mortgage broker. By selling you the lower discounted rate your mortgage broker will recieve no compensation from the lender and will need to be paid for their services by the borrower.

Discount points are tax deductable over the life of the loan.

» 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.