The interest rate you receive when you first decide on a mortgage loan amount may not be the same rate that stays with you throughout the loan. One way you can raise or lower your interest rate is by buying mortgage points at the beginning of your loan.
What Are Mortgage Discount Points?
There are two types of mortgage points. One of them slightly lowers your interest rate but increases costs at closing; the other raises your interest rate slightly but decreases costs at closing. Using discount points can either save you money or end up costing you more.
Discount points are a kind of prepaid interest. They’re fees that are specifically used to buy-down your rate. Typically, one discount point costs one percent of your loan size.
Here are a few examples to show how to calculate discount points, assuming your loan is $200,000:
- 1 discount point would cost $2,000
- >0.5 discount points would cost $1,000
- >0.25 discount points would cost $500
In turn, buying those points would help lower your monthly mortgage payments.
As a general rule of thumb, the bigger the mortgage, its length, and interest rates, the more money discount points will save you. Buying points on shorter-term mortgages or those with low interest rates may not result in any savings.
Before deciding how many discount points to buy, consider how long you plan on staying in your home. Typically, the more points you buy, the longer you’d want to stay to make back the money it took to buy the points. If you sell the house too soon, you won’t recoup the costs and can lose money.
Discount points can also be tax deductible. Since they’re a form of interest, points are usually 100% tax deductible the year you buy your house. You could also negotiate with your lender and have them pay for the points, but still deduct the cost of the points on your taxes.
Remember to compare today’s mortgage rates with and without discount points to see which loan bests suits your financial situation.