The Marquee Loop: Discount points
Discount points are a type of prepaid interest that a borrower can pay upfront to lower the interest rate on their mortgage. Each discount point typically costs 1% of the loan amount and can lower the interest rate by about 0.25% to 0.375%, although this can vary depending on the lender and the market conditions.
Here’s how it works:
- Let’s say a borrower is taking out a $300,000 mortgage at a 4.5% interest rate with a 30-year term. This would result in a monthly payment of $1,520.
- The borrower can choose to pay discount points upfront to lower the interest rate. For example, paying two discount points ($6,000) could lower the interest rate to 4.0%, resulting in a monthly payment of $1,432.
- The borrower should consider whether paying discount points makes sense for their situation. If they plan to keep the mortgage for a long time, paying discount points upfront can result in significant savings over the life of the loan. However, if they plan to refinance or sell the home in the near future, paying discount points may not be worth it.
It’s important for borrowers to do the math and consider their long-term goals when deciding whether to pay discount points to buy down their interest rate on a mortgage. They should also compare the cost of discount points to other options for lowering their monthly payments, such as extending the loan term or making a larger down payment.