| What Is A Discount Point And How It Affects Your Mortgage Rate? |
| Articles - Mortgage |
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When it comes to getting the lowest interest rate for a mortgage loan, the best way to get the lowest rate is to purchase a buy down on the rate. The purchasing of discount points to lower the rate can save you money over the long term of the loan, but it is crucial to know whether a discount point will help you save money.
When it comes to getting the lowest interest rate for a mortgage loan, the best way to get a reduced rate is to purchase a buy down on the rate. The buying of discount points to reduce the rate can save you money over the long term of the loan, but it is crucial to know whether a discount point will help you save money. What Is a Discount Point? First, a buy down or discount point is the term referring to the cost of lowering the interest rate. Usually a discount point is a percentage of the mortgage amount. One discount point refers to one percent of the loan amount. For example, if you are applying for a $200,000 home loan, then one discount point would cost $2,000. A discount point can reduce your rate on average by .125% to .375%. The cost of lowering the mortgage rate can change from day to day when mortgage rates are updated. So, when should you consider purchasing a discount point to your home loan? The best way to figure out the advantages of discount points is to consider the cost of the point and what the savings will be over the lifetime of the mortgage. Each point you pay will reduce your mortgage rate and also lower your monthly loan payment, but each point will also increase your closing cost. The Break Even Point The breakeven point is when the cost of the discount point and the monthly savings evens out. For example, if you pay $2000 in points to reduce your rate and save an extra $50 per month, it would take 40 months to recover the cost of the discount point. Any payment beyond the 40th month is a savings for you. So as long as you keep the mortgage past the breakeven point, then it is a great idea to purchase a discount point. Another reason to buy a discount point is when the seller is paying for your closing cost. This is a way to get a lower mortgage rate and not have to pay for the charge yourself. With today's market, most sellers are paying for buyers closing cost. Of course, there are limits to what the seller can pay. Premium Pricing A discount point helps reduce the loan rate, but a few people would rather take premium pricing and lower the closing cost. Premium pricing will reduce the closing cost by a percent of the mortgage and by doing so, raise the rate of the mortgage. Again, it is important to know where the breakeven point is. For premium pricing, the idea is to keep the loan only for a short period and have the loan paid off or refinanced before the breakeven point. For more information on discount points or premium pricing, contact a mortgage officer. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. David White is a Sr. Mortgage Consultant who specializes in home loans. He has over 12 years experience and he helps his clients with their Dallas home loans. Free reprint avaialable from: What Is A Discount Point And How It Affects Your Mortgage Rate?. |