Some important things you should know about loan options with discount points
Helping borrowers pick the right loan for their homebuying needs is our top priority. That’s why we’re providing even more transparency to home buyers by displaying loan options with discount points. Below, we’ll breakdown some important things you need to know about loan options with discount points and explain how it could help you get more value out of your mortgage:
What are discount points and how do they work?
Discount points are essentially a form of prepaid interest paid to your lender at closing which result in a lower interest rate and monthly payment. This is also known as buying down your interest rate. The more discount points you pay, the lower your rate could be.
How much does one point cost?
Buying one discount point would cost one percent of your loan amount. In other words, if your loan amount was $300,000, one discount point would cost $3,000. (ex: $300,000 * .01 = $3000)
How much will one discount point reduce my interest rate?
If buying down the rate with one discount point, your interest rate could be lowered by at least 0.125% depending on the product and your specific loan scenario.
For example based on a $400,000 purchase price:
| Points with 30 Year Loan | ||
|---|---|---|
| 0 Points | 1 Point | |
| Interest Rate | 4.750% | 4.500% |
| APR | 4.855% | 4.672% |
| Loan Amount | $300,000 | $300,000 |
| Down Payment | 25% | 25% |
| Term | 30 Years | 30 Years |
| Monthly Principal & Interest | $1,564.94 | $1,520.06 |
| Monthly Payment Savings | N/A | $44.88 |
| Discount Point Costs | $0.00 | $3,000.00 |
| Total Closing Costs | $3,592.77 | $6,592.77 |
| Break Even | N/A | 67 Months |
| Total Savings 68-360 months | N/A | $13,149.84 |
Total Closing Costs includes the typical closing costs associated with the loan and any applicable discount point(s).
Total Savings accounts for the total monthly savings over the loan term after you’ve reached your breakeven point.
Why would I purchase discount points on my loan?
The value of discount points depends on how long you plan on staying in the home. The longer you plan to own the home, the more valuable paying for points could be. Discount points are particularly advantageous for borrowers seeking a conforming, fixed rate loan who plan to stay in their home until the breakeven period has been satisfied. Since paying points at closing will reduce your interest rate, you can benefit from lower monthly mortgage payments through the duration of the loan.
Want to figure out how long in months it will take to regain in savings what you spent on buying points? Divide the cost of the points by how much you would save on your monthly payment.
How can I find Rate’s loan options with discount points?
We understand how important transparency is to all borrowers. You can find our loan options with discount points on our homepage, Rate.com, as well as on your loan officer’s personal page.
What else do I need to know about loan options with discount points?
Here are some final points to consider before paying for discount points:
- The interest rate reduction you receive for buying points varies, depending on the lender and the market.
- Paying for discount points could give you a tax benefit. Consult a tax professional to find out.
- Points for an adjustable-rate mortgage (ARM) usually provide a discount on the interest rate during the initial fixed-rate period only. This could impact your break-even point.
- Keep in mind, if you buy points and don’t put 20 percent down, you may need to carry private mortgage insurance (PMI).
Disclaimer
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate, Inc. does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate, Inc. Rate, Inc. its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
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