If you’re looking to purchase a home, you may have heard that discount points can help lower your interest rate and monthly payments. Lenders offer discount points through a one-time, upfront fee. The points lower your monthly payment and can help make the mortgage more affordable for the life of the loan.
Essentially, purchasing points is a long-term savings plan rather than a short-term savings plan because the upfront costs will outweigh the savings if you do not plan to stay in your home for a long time. Find out if discount points are right for you.
What will the length of your loan be?
Will you be doing a 15-year mortgage or a 30-year? Consider what your break-even point will be when purchasing discount points. In other words, how long will it take you to recover the upfront cost you pay?
Say you have a $200,000 loan:
- 1 discount point generally costs $2,000
- .5 discount point generally costs $1,000
- .25 discount point generally costs $500
Although it varies, consider that spending $1,000 on discount points could translate into a $16 savings on your monthly mortgage payment. It would take around 63 months to reach that $1,000 point.
With this example, it may make more sense for someone who has a 30-year loan to purchase discount points than someone who is going to do a shorter loan.
Do you plan on staying in your home long term?
For buyers who plan on staying in their home for several years, discount points may be a good option. Again, you will want to look at your break-even point. If you plan to live in your home for only a couple of years, buying a point may not be worth it financially. But if you plan on staying in your home for more than 6 years, buying discount points may work in your favor.
Do you think you will refinance your loan in a few years?
None of us know where the market will go or what the future looks like for interest rates, but if you are fairly certain that you will refinance your loan in a few years, then you may not reach your break-even point for discount points to be worth your while. However, if you think you will stay with the original loan for several years, then buying discount points might be a good idea.
Do you have a large sum of money to put toward closing costs?
Perhaps you have a large sum of money to use for the down payment and toward closing costs. Using that money to buy down the rate will eat up more funds upfront but give you a lower monthly payment for the life of your loan. If you have money to put toward closing costs and want a lower payment, discount points may be right for you.
When thinking about whether or not you should buy discount points make sure to take all the costs into consideration. Our loan advisors can help you crunch the numbers to determine if discount points fits your mortgage needs.