What are Discount Points?

This week, a client insisted on paying a point to lower their rate. However, once we worked the numbers, they changed their mind!

Discount points are a cost you pay to get a lower interest rate on your mortgage. Essentially, you are prepaying interest upfront to lower your rate over the life of the loan. Typically, but not always, one point, which is one percent of the loan amount, would lower your rate by .25%. So, the client and the mortgage professional need to look at how much it will cost upfront, what the monthly savings are, and how long it will take to make up the cost with the savings.

Discount Point Savings

Here is an example. Harris is buying a house for $600,000 and getting a mortgage of $480,000. His superstar mortgage professional (me!) offers him a 30-year fixed rate of 6.5% with no discount points or 6.25% with one discount point. The cost of the point is $4800 and the monthly savings is $39. Divide 4800 by 39 and you get 123 months. So, it would take just over 10 years to make up the upfront costs with the savings. Harris chose the no-point option because he assumes that either he will move or refinance well within those 10 years, so he will not get the benefit of paying the point upfront.

Please contact me with any questions.