How Do Mortgage Discount Points Work?

When you buy a home in Orem, Utah, your mortgage lender may offer you the opportunity to buy down your interest rate by paying for discount points. The more points you buy, the lower your rate will be, but your closing costs will rise.

Mortgage discount points are completely optional, and for some Orem homebuyers, paying more at closing to get a better interest rate makes sense. For others, the opposite is true. So, is paying for points a good idea for you? Only you can answer that question, but the following information should help you decide.

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How Much Do Mortgage Discount Points Cost?

As a general rule, each point costs one percent of the mortgage principal, or the total amount borrowed. Most lenders let borrowers buy between one and three points, and some allow people to purchase partial points.

So, for example, if you take out a home loan for $200,000, buying one discount point will cost you $2,000. Two will total $4,000, and a ½ point will be $1,000. However many you purchase, the fee will be due at closing.

What Do You Get for the Discount Points You Buy?

Every point or partial point you buy reduces your interest rate by a certain amount. The discount you receive varies by mortgage lender, but as a general rule, you can expect a rate drop of .25 percent in exchange for a full point.

As an example, let’s say your lender has offered you a $200,000 30-year fixed-rate mortgage with an interest rate of 5 percent. With those terms, your monthly home loan payment would be $1,073.64.

Buying one discount point would bring your interest rate down to 4.75 percent, which would bring your payment down to $1,043.29 – saving you $30.35 per month. Purchase two points to get a rate of 4.5 percent, and your mortgage payment would be just $1,013.37. Your monthly savings would then be $60.27.

Is Paying for Discount Points a Good Idea?

Depending upon your situation, mortgage discount points can be worthwhile. If you agree with the following statements, buying points may be to your benefit:

  • You have enough cash available to cover the cost, and you’re not worried about having to pay more money at closing.
  • You want a reduced rate to make your monthly mortgage payments more affordable and to pay less interest over the entire home loan term.
  • You plan to keep both your Orem home and your current mortgage long enough to recoup the cost and start saving money.

That last point is the real problem when it comes to deciding whether or not to buy mortgage discount points No one can predict what the future holds, and if you end up refinancing your mortgage or selling your Orem home before your savings match the upfront costs, you’ll end up losing money.

Have questions? The Utah home loan experts at Intercap Lending can explain exactly how mortgage discount points will affect your interest rate and monthly payment – and we’re ready to find your ideal mortgage solution. Contact our office in Orem, Utah, today!