When you're in the process of shopping for a mortgage, your lender may present you with the option of buying discount points. What are points, and should you buy them? Learn how discount points affect your mortgage and when you should consider buying them.
What Are Discount Points
Discount points allow you to pay upfront some of the interest on your home loan, and in exchange, you receive a lower interest rate on your mortgage. You pay your lender a one-time fee for the discount points when you close your loan.
One discount point is equal to 1% of the loan amount (or $1,000 for every $100,000), and you can buy one or more points. However, the amount a point can reduce your mortgage interest rate can vary.
Discount points are also referred to as mortgage points, origination points or simply points. Don't be afraid to ask your lender for clarification if you're not familiar with the terminology they're using.
An Example of Discount Points in Action
Let's say you have a $200,000 30-year fixed-rate mortgage, and your mortgage rate is 4.25%.
One discount point would cost you $2,000, and it could reduce your interest rate by about 0.25% to 4%, depending on your lender. This would translate to $29 in savings on your monthly mortgage payment, not including insurance or taxes.
The amount you pay in discount points may also be tax-deductible.
Is Buying Discount Points Right for You?
Buying points is most beneficial when you plan to own the home you're purchasing for a long time. As a rule of thumb, you should consider paying points if you plan to own your home for more than 10 years.