Understanding Discount Points

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Understanding Discount Points

Understanding Discount Points : Make Sure You Understand

At its basis, Discount Points are a form of pre-paid interest.  What borrowers are doing are essentially buying down the interest rate that is going to be charged on their mortgage.  When purchasing points, the amount that you pay is calculated off the amount borrowed.  As you can see, when loan originators are talking about buying points, it is easy to get confused rather easily as it may be cloudy to determine what you are going to have to pay and how much it will reduce your interest rate.  Under most circumstances when you are buying 1 discount point it is equivalent to a 25 basis points or .25% reduction in your mortgage interest rate.  See how Understanding Discount Points is important to knowing how much you are spending to reduce your interest rate?

Understanding Discount Points: How Is Your Rate Calculated?

When you are shopping for a mortgage and getting quotes from different companies, you are going to need to Understanding Discount Points and if there are any points needed in order to get the interest rate proposed to you.  When you first look at your offers you will see your mortgage rate and then the corresponding number of points needed to obtain that rate.  Let’s look at the example below to illustrate this and help your Understanding Discount Points:

–          Let’s use a loan of $250,000 and 1 discount point equals a .25% reduction in interest rate.

  • 3.50% Interest Rate with 2 Discount Points
  • Interest rate was 4.00% and you would need to buy 2 Discount Points totaling $5,000 in order to obtain the 3.50% interest rate.
  • 3.50% Interest Rate with 1 Discount Point
  • Interest rate was 3.75% and you would need to buy 1 Discount Point totaling $2,500 in order to obtain the 3.50% interest rate.

After seeing these examples, you now have to calculate if it is worth it for you to pay for Discount Points to obtain the interest rate you want.  There are reasons you would and wouldn’t want to buy Discount Points and Understanding Discount Points is key to making the proper decision.

Understanding Discount Points: To Buy Or Not To Buy?

By Understanding Discount Points you will know that you will pay 1% of the loan value in order to reduce your interest rate by .25%, so you will need to figure out if buying points is right for you.  In example #1 above, you will have to pay $5,000 to reduce the interest rate by .50%.  Now to find your breakeven point of this purchase, you will need to figure out how long it will take you to recoup those savings from the lower rate.  For that example at 4.00% interest rate the payment would be $1,194 and at 3.50% the payment is $1,123.  The reduced rate saves you $71 per month and when you divide that into $5,000 you will see that it will take you 70 months or a little less than 6 years in order for you to regain that $5,000 you spent on these points.  Now this would be great if you plan on staying in your home long-term, however, if you plan on being in your home for 5 years or less, laying out $5,000 will not see you recoup this with your lower interest rate.  As you can see Understanding Discount Points is vital in making sure you don’t spend any more money than is necessary for you.

If you are still confused or have questions regarding Understanding Discount Points you need to give me a call ASAP at 888-900-1020 or visit my website www.loanconsultants.org and we can go over what option is best for you.  I look forward to helping you in getting the home of your dreams for the lowest monthly payment.

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