Discount Points
What are discount points?
Discount points are fees paid to a lender at closing in order to lower your mortgage interest rate. The cost of each point is equal to one percent of the loan amount. For instance, for a $100,000 loan one discount point equals $1,000.
Why would I want to buy points?
Paying points lowers your interest rate. The lender receives the income at closing rather than over the long term as you pay your loan.
Each discount point paid on a 30-year loan typically lowers the interest rate by 0.125 percent. That means a 7.5 percent rate would be lowered to 7.375 percent if you purchase one point.
Calculating
Whether or not paying points makes sense for you depends in part on how long you plan to keep the loan. Use a mortgage calculator to help you decide.
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Calculate the amount of your monthly payment at the interest rate you will be charged if you do not pay points.
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Calculate the amount of your monthly payment at the lower rate if you do pay points.
- Deduct the lower payment from the higher payment to find the amount saved each month.
- Divide the amount charged for points at closing by the monthly amount saved. The result is the number of months you must keep the loan to break-even on paying points.
Example
$100,000 Loan - 30 Year Term
7.5% Interest, no points = $699.21 monthly payment Buying 1 point for $1,000 = monthly payment $690.68
Monthly Savings = $8.53
$1000 ÷ $8.53,
Break Even Point = 117 Months
In the example above you would have to keep the home loan for nearly ten years to recover the cost of buying discount points (considering only the simple calculation of those funds at today's value).
Can the seller pay for my discount points?
Probably. Talk with your lender about what's allowed with your loan. The seller will probably want a higher sales price if paying a portion of your fees, but you can move into the house with less cash at closing.
Are discount points tax deductible?
Yes, points paid for residential real estate are tax deductible in the year they are paid. Buyers may deduct the amount paid even if the seller pays for the points at closing.
Are discount points the same as an origination fee?
An origination fee is a fee charged to process your loan. It typically costs the same as one point, but it is a separate fee. Ask each loan officer or mortgage broker you talk with if you will be charged an origination fee.
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