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Discount points
Discount points are fees paid to obtain a lower interest rate on your mortgage. The more points you pay, the lower the rate you obtain. Typically, when a lender refers to a point, it equals 1% of the loan amount and will lower the interest rate by .25%.
| Pro |
Con |
| Paying points may be beneficial if you intend to stay in your house for a long time. |
If you don't intend to keep the mortgage very long, the cost you pay for points may exceed the benefit you'd receive from a lower interest rate. |
To get an idea of whether or not you should consider paying points, divide the amount paid in points by the amount saved by the lower monthly payment. For example, lets assume that you are borrowing $100,000 with no additional points (other than the origination fee) and you can get a rate of 7%interest for 30 years, which equatest to roughly $665 per month. Or, you can pay two points to receive a 6.5 percent rate, which is roughly $632 per month. Your savings per month with the new lower payment would be $33 ($665-$632).
The amount you pay for two points would be about $2,000 (each point is 1% of 100,000 or $1,000). Therefore, $2,000 (amount paid for points) divided by $33 (savings per month) = 60.6 months. This is how long you would need to keep the house or the mortgage to break even on the cost of the points. Every month after that, you really save the $33.
Once you've considered the various types of mortgages, rates and discount points, and have a pretty good idea of what might be appropriate given the amount of your downpayment, it's time to find the right lender and mortgage for you.
Find the right lender and mortgage
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