When you apply for your mortgage, you have the option to pay fees called discount points for access to “discounted” mortgage rates.
Discount points literally discount your interest rate. They’re an upfront-fee paid to a lender in exchange for lower mortgage rates you would other get.
One discount point costs 1 percent of your loan size. In a real-world example, then, if you’re borrowing $300,000 to buy a home, paying one discount point would come at a cost of $3,000.
As a general rule, one discount point paid lowers your interest rate by one-quarter percentage point. On the same example loan amount, at today’s mortgage rates, paying one point would lower your mortgage payment $43 per month.
Lower monthly payments are good for a household budget. Less money spent on housing means more money remaining for making home improvements, saving for your future, and personal emergencies.
Low payments also help get your mortgage approved.
According to the Ellie Mae Origination Insight Report, 80.0 percent of today’s home buyers get mortgage-approved. On average, those buyers commit 37 of their income to debts including credit cards, loans, and mortgages.
So, how do you know when it’s smart to pay points? Here are three common examples:
- You have cash in the bank, but not a lot of income – discount points make your payments manageable
- You’re certain you won’t sell or refinance your home within the next five years
- The seller is paying your closing costs, and you have cash leftover after paying everything else
Paying points don’t often make sense – especially for first-time home buyers. However, it’s worth a conversation with your lender to understand your options.
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