When you take out a home loan, your lender may ask if you want to pay for any mortgage discount points.
Paying for points is a way of prepaying interest on your mortgage. The more you buy, the lower your home loan interest rate will be – which is why the process is referred to as “buying down the rate.”
For more details on mortgage discount points and practical advice on when paying for them is a smart move, read on.
How Discount Points Affect Mortgage Interest Rates
One point is equal to one percent of your home loan. So, if you take out a home loan of $300,000, you will pay $3,000 for a full point. In exchange, your lender will typically reduce your interest rate by .25 percent.
Depending upon your mortgage lender, you may have the option of paying anywhere from half a point to several points. Or, of course, you can decide not to buy any at all.
How Buying Points Changes Monthly Mortgage Payments
Paying for discount points brings down your interest rate, which therefore reduces your monthly mortgage payments. But how much can you save?
Let’s say you take out a $300,000 home loan with a 30-year term and a base interest rate of 5 percent. Without any points, your monthly principal and interest would be $1,288.
If you pay one point, your interest rate will drop to 4.75 percent – and your mortgage payment will go down to $1,252. Your savings per month, then, will be $36. With two points and a rate of 4.5 percent, your amount due will fall to $1,216, which saves you $72 per month. In either case, you will break even in 84 months, or 7 years.
When Paying for Mortgage Discount Points Makes Sense
If you can afford to buy points, should you do so? The decision comes down to how long you plan to keep your current mortgage.
Paying for points only makes sense if you continue paying on your home loan until you break even, as after that time, you start to come out ahead. If, however, you refinance your mortgage or sell your home before then, you will end up losing money on the transaction.
To figure out what’s in your best interest, run the numbers. Or, speak with a mortgage expert, someone who can answer your questions about taking out a home loan.
If you live in Utah, turn to Integrity First Lending. Our free mortgage calculator makes it easy to see how discount points will affect your total monthly payment. And, our friendly team of highly experienced loan officers is always happy to offer advice and share their expertise.
Whether or not you pay for mortgage discount points, Integrity First Lending can help you find the ideal home loan solution. Contact our South Jordan or Tooele, Utah, office today.