Sometimes points are referred to as mortgage discount points, and experts agree that they are not always understood by the borrower. Points are equal to one percent of the total loan amount, and they are used to pay interest ahead of time. So if you are getting a loan for $200,000, one point would be equal to $2,000. Mortgage discount points are paid up-front, at the time of closing. It is important that a borrower understand that discount points are an interest payment, so they do not reduce the loan amount.
What mortgage discount points do is allow the borrower to have a lower monthly mortgage payment. In general, the mortgage interest rate goes down about a quarter of a percentage point for every mortgage discount point you pay. However, sometimes lenders give better discounts for points paid.
Deciding whether or not to take advantage of discount points or accept a higher interest rate depends on a number of factors. One of those factors involves assessing your break even point. If you only plan on staying in your home a couple of years, you will probably not want to pay discount mortgage points. However, if you plan on keeping your mortgage for over 10 years, paying points will save you money in the long term. If you question how points will affect you in the time between, you can ask your mortgage lender to draw up a chart telling you your options.
Another factor in determining whether you want to pay mortgage discount points or take a higher interest rate is whether or not you have the money upfront for points. Since each point is worth one percent of your total loan amount, each point can cost quite a bit. If you do not have the money to put into points you may want to opt for a higher interest rate. Though your monthly mortgage payment will be higher each month with a higher interest rate, you will not have to have the total amount up front by paying mortgage discount points.
Whether or not you choose to use mortgage discount points or pay a higher interest rate depends on your current financial situation along with the length of time you will remain in your home. Discuss your options with your mortgage lender, as they will be able to tell you how much of a discount mortgage discount points will actually give you and if they will work best for your situation. Also take an assessment of how much money you will be able to put into mortgage discount points to see if they are really the best option for your mortgage.
