Discount point
- Normally paid at closing and generally calculated to be equivalent
to 1% of the total loan amount, discount points are paid to reduce
the interest rate on a loan.
If you plan on living in your home for a longer period of time
paying discount points to have a lower interest rate can be a great
advantage.
You can save tens of thousands of dollars by paying a couple grand
to buy down your rate. Contact me now
and I can do an analysis to show you the cost savings of paying
discount points.
When paying discount points one has to understand the difference
between cost and price. When a loan is amortized over the 30 year
period the total payment for the loan is the cost. You have to reffer
to a amortization schedule to understand how much the loan will
cost over the term of the loan. When paying points (lower price)
to buy down a rate you are saving money (lower cost) over the life
of the loan.
Homeowners who are "cash rich and income poor" often choose to
pay discount points to buy down the interest rate. With a lower
interest rate, these homeowners can often qualify for a mortgage
loan amount that he would otherwise not qualify with his income.
If you only plan on staying in the property for a few short years
then it might be to your advantage to not pay discount points and
go with the higher rate. Seeing the difference on a spread sheet
or using a financial calculator will help you make the decision
that is right for you.
Points, sometimes referred to as Discount Points are different
than origination fees, and are a source of confusion for many borrowers.
Although "points" are a part of your closing costs, they are not
considered loan fees. They are an optional way to buy the interest
rate up or down. Interest rates are generally quoted in increments
of eighths. Usually, the lower the interest rate, the more points
you will be required to pay.
You can also use discount points as a tax deduction when federal
income taxes become due.
Paying a discount point or points in order to lower the interest
rate when refinancing into a long term fixed rate mortgage often
makes good sense. The discount points can usually be financed into
the loan.
Even with a higher loan principal to cover the points, the borrowers
monthly payment is usually lower due to the lower rate of interest
charged.
The discount point is pre-paid interest so you should know how
long you will be in your home to see if it makes sense for you.
The longer you will be in your home the more you will realize a
greater savings.
