March 28th, 2014 9:36 AM by Jackie A. Graves, President
rates you see may be teaser rates and they aren't going to be available to you
when you apply for a loan. That's because banks will charge you
"discount" points to give you their best rate. You're not required to
pay points, but it's a choice if you want a lower interest rate.
Explains David Reed, author of Mortgages 101, "points", or discount
points, are a percentage of the loan amount. If a mortgage is $200,000, then
one "point" is $2,000.
you pay $2000 up front to save a point over the life of the loan? It's a
function of how the rate is offered, says Reed.
point paid, your interest rate should be reduced by about 1/4 of a point. If
you can get a 5.00 percent loan with no points, then you can likely get the
same loan at 4.75 percent by paying one point.
point "discounts" the interest rate, that's why it's referred to as a
discount point. You're paying the cost of the discount points in your closing
costs in advance. That's cash you could use in your down-payment, or to buy
furniture or to upgrade your home.
says he isn't a fan of paying discount points, because the math never seems to
30-year mortgage loan at $300,000 and 5.00 percent interest, the monthly
payment works out to $1,610 without any points. Paying one point ($3,000) would
reduce your rate to 4.75 percent, making your discounted payment $1,564 per
a reduction of $46.00 per month. Now weigh that against the cost of $3,000. To
get that, divide $46 into $3000. The result is 65. What that means is it will
take you 65 payments to break even, nearly 5 ½ years.
about paying two points? The math is still the same. On that same $300,000 loan
at 4.50% and two points the monthly payment is $1,520, or lower by $90.00 per
month when compared to the 5.00 percent rate.
that $90.00 into the two points of $6,000 and the result is (drum roll, please)
67. It would take 67 months to break even.
general, it will take about five years to break even for every discount point
paid. If you don't plan on staying in your home for at least five years or
more, you won't come out ahead.
say take the $3,000 and pay down the principal," says Reed. "Pass on
always a good idea to borrow less.