Discount Points

People often ask us ‘Should I pay discount points?’

When acquiring mortgage financing for either your new home purchase, or to reduce the interest rate by refinancing, one decision you must make is; should you pay discount points. Each borrower should have the option to reduce the interest rate, by paying discount points; it should not be mandatory.

Consider this; mortgage discount points are simply interest paid in advance. A discount point is usually 1% of the mortgage loan amount, and is used to buy-down the current interest rate by ¼ of 1%. If you are considering paying a discount point of 1% to reduce your interest rate, think about this:

If the current 30-year fixed rate were 7%, with no discount points, the payment on a mortgage of $150,000 would be $997.95 (principal and interest). Buying-down the interest rate with one discount point $1,500 or 1%, may reduce that interest rate by ¼% to 6.750%, with a new payment of $972.89 (principal and interest).

Notice the payment difference between the two mortgages, only $25.06. To calculate the recovery period, simply divide the cost of the discount point by the monthly savings, or $1,500.00 / $25.06. The recovery period in this scenario is 59.85 months or a about 5-years.

What most people don't realize is that since it took 5 years to just recover the cost of paying for that discount point, it will take 5 more years to simply save that same amount of money. Moreover, in 10 years you would have saved only what you spent when you paid for the discount point.

It usually always makes sense to get the best interest rate available without having to pay for any discount points. Exceptions to that statement include:

· Your Tax Advisor's or CPA's recommendation

· If the ‘seller’ or builder will pay them

· If your employer is paying them; usually as a relocation package

Please feel free to contact us at anytime! We look forward to hearing from you and helping you determine the best Loan Program and the Best Rate available! If you or someone you know is in need of a mortgage home loan we would love the opportunity to provide a good faith estimate and discuss what options are available to you.