When you want to get a lower interest rate on your mortgage, buying discount points for a mortgage can help you make it happen. Borrowers can buy discount points with extra cash at closing to reduce their interest rate and monthly payments.
Check out our free mortgage discount point calculator to learn how discount points work, how much discount points cost and how long it will take you to break even.
Buying discount points (or mortgage points) means paying extra cash at the time of closing to reduce the interest rate and monthly payments. Another option would be to use that money towards a larger down payments, reducing the loan amount. Which option makes the most sense? Use this calculator to find out how long it will take to recuperate the cost for buying points called the break-even.
If you plan to move or refinance sooner than the break-even date, consider putting the money towards a larger down payment.
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One (1) discount point costs 1% of the loan amount. Each discount point may lower the interest rate as much as 0.25%, depending on product and loan characteristics. Contact a PrimeLending loan officer for more details. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only. Calculator results are rounded down to the nearest dollar. Payment shown does not include taxes, insurance, or mortgage insurance (if applicable). This does not constitute an offer or approval of credit. Contact a PrimeLending home loan officer for actual estimates.
For example, a Conventional fixed rate loan with the following terms: purchase price of $400,000, loan term of 360 months, down payment of 20%, and an interest rate of 7.625%, will result in an annual percentage rate of 7.722%. Rate pulled 05/01/24, rates subject to change. Loans are subject to borrower qualifications, including income, property evaluation, and final credit approval.
What are mortgage points (or discount points)?
Mortgage points — a.k.a. discount points — are upfront fees a borrower pays a lender to get a reduced interest rate on their home loan. One (1) discount point costs 1% of the loan amount. Each discount point may lower the interest rate as much as 0.25%, depending on product and loan characteristics.
By using discount points to lower your interest rate, you effectively lower your overall monthly payment as well. This could lead to increased savings over time, depending on how long you plan to live in your home, or help you afford more home. The amount you can save depends on how many discount points you purchase, so the more points you buy, the lower your rate may be.
Pro tip: Talk to a tax professional about whether you may deduct any discount points you paid to get your mortgage when tax time rolls around.
How much does it cost to buy down my interest rate?
The cost to buy down your interest rate depends on the amount of mortgage points you buy. One point equals one percent of the principal mortgage amount, so on a $250,000 loan one point would cost $2,500. Using an example where 1 discount point reduced the rate by 0.25%, to buy down your interest rate by 1% the mortgage points would cost $10,000.
Here's another way to look at it. One mortgage discount point may reduce your interest rate by up to 0.25%. So, if your mortgage rate is 5%, one discount point would lower your rate to 4.75%, two points would lower the rate to 4.5%, and so on. By using a discount point calculator, like the one above, you can get an estimate of how much you could save over the life of your loan if you buy discount points.
Keep in mind that discount points are only effective if you stay in your home long enough to recoup the money you spent on them; this is called the break-even point. If you plan to sell your home or refinance in a few years, a temporary buydown may make more sense for your situation.
Also, you should only buy the mortgage points if it works for your budget in the current market conditions. If you believe you can comfortably afford your monthly payment and have some money left over to build your emergency fund, discount points might be a worthwhile investment to get a lower mortgage rate.
When should you buy discount points?
Since buying discount points is an upfront cost of reducing your interest rate, the conditions need to be right for you to get all the benefits of doing so. There are certain times when it makes sense to buy down your interest rate with mortgage points. Some instances that might make the most sense include:
Planning to live in the home long term.
Buying mortgage points can save you money over the life of the loan, but you need to live in your home long enough to recoup the money you spent to reduce your interest rate. The longer you live in the home, the more savings you could see. If you don’t plan to stay in the home long enough to get past the break-even point, discount points might not be the best option for you.
No plans to refinance soon.
If you are thinking of refinancing to a lower interest rate down the road but also want to buy discount points, think again. A refinance changes your interest rate so you may not need mortgage points if you are going to get a new mortgage before you break-even on the cost of your discount points.
Are discount points different than a temporary buydown?
Discount points and a temporary buydown both achieve the same goal — lowering a borrower’s mortgage interest rate. However, they are very different options. While discount points lower the interest rate on a mortgage for the life of the loan, a temporary buydown reduces the interest rate for up to the first three years of a mortgage. Try our free temporary buydown calculator to see if a temporary buydown could be a good choice for you.
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