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WHAT ARE DISCOUNT POINTS
What are discount points in mortgage loans? What is the purpose of discount points? Why do I need to purchase discount points? Who charges discount points and how does discount points benefits the buyer? How do we know if a discount point is worth the cost?
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3 Replies
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Can you please give several case scenarios on how discount points work for a mortgage borrower?
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This reply was modified 3 months ago by Alison Simpson.
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Example Cases on the Operation of Discount Points
Case 1: Small-Savings Loan
Loan Amount: $300,000
Interest Rate Without Points: 3.5%
Interest Rate With 1 Point: 3.25% (Cost: $3,000)
Monthly Savings: $42
Break-Even Period: 71 months
Result: Worthwhile if staying for more than six years.
Case 2: Large-Investment Loan
Loan Amount: $500,000
Interest Rate Without Points: 4.0%
Interest Rate With 2 Points: 3.5% (Cost: $10,000)
Monthly Savings: $142
Break-Even Period: 70 months
Result – Good if staying for over five years.
Case 3: Short Term Stay
Loan Amount I borrowed: $250,000
Interest Rate Without Points: 3.75%
Interest Rate With one Point: 3.5% (Cost:$2,500)
Monthly Savings:$34
Break-Even Period: 74 months
Outcome – Not worth it if you plan to sell within six years.
In every scenario where somebody buys discount points, it reduces their monthly mortgage payment, but you have to calculate how long you’re going to stay with the mortgage to determine whether it’s a good financial decision or not based on when the break-even point is.
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This reply was modified 3 months ago by
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What are mortgage points?
Mortgage points are upfront fees paid at closing in exchange for a reduced interest rate on the loan. Typically, one point equals 1% of the loan amount and decreases the rate by an eighth or a quarter of a percent, depending on the lender.
Purpose of Discount Points
They aim mainly at reducing monthly mortgage payments throughout their life span, thus creating long-term savings.
Who Charges Discount Points?
Lenders are responsible for charging these fees, which borrowers pay during closings.
Benefits for the Buyer
Depending upon how long one intends to stay put, buying these little guys can save you some serious money over time. This is especially if we’re talking decades here when our houses become homes forever.
Is it worth it to pay a discount point?
To determine whether or not it is worthwhile to purchase points, calculate a “break-even period”. How many months before lower monthly costs surpass initial expenditure. If this number happens to be less than your expected tenure (i.e., number of years staying), go for those bad boys!