A discount point is a form of mortgage interest. Each point equals one percent of the loan amount. If you pay points up front, it lowers your interest rate over the life of the loan. Some homeowners vehemently recommend paying discount points at the start of the loan. Others encourage their first-time home buyer friends to keep their upfront costs low so they can get in a home sooner. The value of discount points will vary for each mortgage and each homeowner, but generally, discount points pay off more on longer loan terms.
To see how discount points would affect your mortgage, use this calculator.
Paying points reduces your interest rate, which reduces your monthly principal and interest payment. Find out how much your interest rate will decrease by paying for a discount point. Then think about how long you plan to stay in the home or how long of a mortgage term you want to get. In some situations, you may not find much (if any) savings from paying discount points. It’s also important to note that discount points are paid at closing, so choosing this option will increase your upfront costs.
If you don’t think points will pay off for you, but you want a lower interest rate, shop around! Lenders want your business, and will work to get you the best deal. Credit unions are a great resources for low cost financing and personalized help. Check out this article on credit union savings.