Should You Pay for Mortgage Discount Points?

When you take out a home loan, scoring a low interest rate can save you a great deal of money in the long run. By paying for mortgage discount points, you can buy down your rate – and if you’re like some Orem homebuyers, the decision may make perfect sense.

How do discount points work? When is paying for a lower interest rate the right move? Here’s what you need to know.

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Mortgage Discount Points – The Basics

Essentially, mortgage discount points shave off a portion of the interest rate on a home loan. Also called mortgage points or discount points, each one is equal to one percent of the principal, or the total of the loan. Depending on their mortgage lenders, Orem borrowers may have the option of buying between ½ and three points.

How much does each discount point cost? Most mortgage lenders charge about one percent of the loan total. So, for instance, with a home loan of $300,000, a single point would cost $3,000. In exchange, the borrower can expect their interest rate to drop by .25 percent.

The more mortgage points a person pays for at closing, the lower their interest rate will be – but, that doesn’t mean paying for points is always a good idea.

When are Mortgage Discount Points Worth the Cost?

If you can afford to pay for mortgage points, doing so could be financially fortuitous – but that will only the case if you keep the mortgage for longer than it takes to recoup the cost. Refinance the home loan or put the Orem property on the market before that time, and you won’t benefit from any points you purchase.

How long will it take to break even? That depends, but as an example, let’s assume a mortgage lender has offered you a $300,000 home loan with an interest rate of 6 percent. Under the terms, your monthly mortgage payment would be almost $1,800.

Now, let’s say you decide to buy two points to bring your interest rate down to 5.5 percent. Your mortgage payment would drop to just over $1,700, saving you nearly $100 each month. Since the upfront cost is $6,000, it would take about 60 months (or 5 years) to break even. After that time, you would start to come out ahead – and if you’ve already refinanced or sold the Orem property by then, you’ve lost money on the transaction.

Talk to a Utah Mortgage Expert Today

Do you have questions? The friendly and knowledgeable Utah home loan team at Intercap Lending is always happy to offer explanations and advice. If you’re in or near Orem, Utah, and want to know if paying for mortgage points might be a smart decision, contact our office today!