Buying a home is one of the most expensive purchases most of us will make in our lives. When shopping for a home and a mortgage we naturally will look at options to help us save money—be it negotiating the home’s sale price, finding the best mortgage rate and program, and buying mortgage discount points.

What are mortgage discount points and how could they benefit you as a buyer?

mortgage ratesDiscount points can cut interest costs

Also called “buying down the rate”, mortgage points are fees buyers pay the lender upfront to reduce the interest rate of a loan. When you pay mortgage points you are essentially prepaying interest. One discount point costs 1% of your mortgage amount (or $1,000 for every $100,000)

Know how long are you planning on staying in the home

If you plan on only being in the home for a few years, it’s typically not recommended that you pay discount points. This is because there is what is known as a “break-even period” where you will recover the money spent on discount points.

To calculate your break-even point, divide the cost of the discount points by the amount the reduced rate saves each month.

Always run the numbers before buying points

Do you have the cash available to buy points upfront? What are the interest rates for your lender? Asking yourself these questions before using discount points to reduce your interest rates, and consult with your agent and lender. They will help you determine what makes the most financial sense for you and you unique situation.

Discount points are not lender credits

It’s important to make the distinction between getting discount points and lender credits, as they are not the same thing. Lender credits work the same way as discount points, but opposite. Instead, you pay higher interest rates and the lender give you money to offset closing costs. You pay less upfront but more over time.

Lender credits are calculated much the same as mortgage discount points.

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