Mortgage Discount Points Explained

Are you getting your finances in order to buy your first home? Nice! As you dive into the world of mortgages, one term you may come across is "mortgage discount points." Don't worry if you've never heard of them before. In this blog, we'll break down what mortgage discount points are, how they work, and whether or not they're worth considering for your mortgage. So, let's get started!

What Are Mortgage Discount Points?

Think of mortgage discount points as a way to buy a lower interest rate on your mortgage. They're essentially prepaid interest that you pay upfront at the time of closing and lower your interest rate for the life of your loan. The cost of one discount point is equal to 1% of your loan amount. For example, if you're taking out a $300,000 mortgage, one discount point would cost you $3,000.

By paying these points upfront, you're securing a lower interest rate on your mortgage, which could save you money in the long run.

How Do Discount Points Work?

When you buy discount points, you're essentially paying some of your mortgage interest upfront. In exchange, the lender offers you a lower interest rate on your mortgage. One mortgage point can reduce your rate by -0.25%. The more points you buy, the lower your interest rate will be. However, buying discount points is totally optional, so it is up to you to decide if it makes sense for your specific financial situation.

How Do Discount Points Affect The Mortgage Rate?

The relationship between discount points and mortgage rates is generally inverse: the more discount points you buy, the lower your mortgage rate. However, the exact reduction in the mortgage rate will vary from lender to lender and may also depend on the overall market conditions.

Doing research on mortgage rates with a trusted lender will allow you to find the mortgage rate and terms that fit your situation. Make sure to ask your lender how many discount points you would need to purchase to lower your interest rate by a specific amount, as this can help you make an informed decision.

Is Buying Discount Points Worth It?

Whether or not discount points are “worth it” entirely depends on your budget, needs, and how long you plan to stay in your new home. Buying discount points can be a smart move if you plan to stay in your home for a long time, as the money you save on interest over the life of the loan may outweigh the upfront cost of the points. However, if you plan to move or refinance in a few years, you may not have enough time to recoup the cost of the points through your lower monthly payments.

As you consider if buying discount points is worth it, think about these factors:

Your financial situation. Do you have enough cash on hand to cover the cost of the points without sacrificing your emergency fund or other financial goals?

The break-even point. Calculate how many months it would take to recoup the upfront cost of the points through your lower monthly payments. If you plan to stay in the home longer than this break-even point, buying mortgage points could be a good decision.

Future plans. If you plan to move or refinance soon, buying discount points may not make sense, as you won't have enough time to enjoy the lower interest rate.

5 Benefits Of Buying Mortgage Discount Points

If buying discount points makes sense for your situation, you may be able to experience benefits like:

• Lower monthly payments. A lower interest rate means lower monthly mortgage payments. This can provide you with more financial flexibility and help you allocate funds towards other financial goals or expenses.
• Long-term interest savings. Over the life of your loan, a lower interest rate can save you a significant amount of money in interest payments. The longer you plan to stay in your home, the more you can potentially save.
• Potential tax benefits. In some cases, the cost of mortgage discount points can be tax-deductible, depending on your specific financial situation. It's important to consult with a tax professional to determine if this applies to you.
• Increased home equity. With a lower interest rate, you can pay off more of the principal balance on your mortgage with each monthly payment. This can help you build equity in your home faster.

Mortgage discount points can be an advantageous tool for first-time homebuyers looking to save money on their mortgage over time. However, you should carefully consider your financial situation, future plans, and break-even point to determine if buying discount points is the right move for you. Try this free mortgage point calculator from PrimeLending to calculate the impact of discount points.

Don't hesitate to ask a trusted lender questions or seek professional advice as needed.