Discount points can be used to save you money on your mortgage payment long term. Here’s how they work.
Discount points are a fee that you pay a lender in advance in return for a lower interest rate through the life of your mortgage. These can equate to huge savings, but you always have to look at it in a cost versus benefit situation.
If you plan to be in a home for longer than five to seven years, it might make sense to pay a little more at closing in order to save on your mortgage each month. It’s all about whether saving money later or saving money now is a better idea.
Discount points are going to lower your monthly payment, but they also have tax advantages. Be sure to check with your tax professional first, but discount points have been tax-deductible in the past.
“Discount points are not always avoidable.”
Here’s an example of how discount points work in action. On a $200,000 loan at 4.5% interest, you will have a payment of about $1,013 (not including calculations for taxes, insurance, HOA, etc). If someone would have paid $1,000 in discount points at the time of closing on this home, their payment goes down to $983 and that $1,000 recoups after roughly 28 months. If you’re going to be in your home longer than five to seven years, buying discount points makes a lot of sense.
Unfortunately, discount points are not always avoidable. If you have a lower credit score, usually sub-600, your rates are going to be much higher than someone with a credit score above 660 because the lender is assuming more risk in funding your loan. Due to this, it is often hard to qualify someone with a lower credit score and these individuals must use discount points to buy their rate down to a point that they qualify for the loan at all.
Here at Success Mortgage Partners, we aren’t paid on your interest rate so it doesn’t matter to us. Our goal is to get you to the closing table with the home of your dreams, and we can help you do that by offering our expertise and guidance when it comes to things like interest rates and discount points.
If you have any questions for us in the meantime, don’t hesitate to give us a call or send us an email. We look forward to hearing from you soon.