What is a Discount Point?
Discount points (or sometimes referred to as just "points") are a way to lower the monthly payment by paying down the interest rate at the time of the loan's origination. For buyers who are planning on being in their homes for the majority of the loan's term, discount points make economical sense; after all, the savings from a lower rate will be beneficial over a longer period of time. Here is how they work.
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A point is written as a percentage of the loan's original amount. Example, 1 discount point on a $225,000 loan is $2,250 or 1% of the loan. 1.75 discount points would be $3937.50 and so forth. The rate that you want to have your loan paid down to has an associated amount of discount points that will need to be paid when the loan is originated. Lenders typically have their own schedule of rates and points. If you are considering lowering your monthly payments by paying discount points make sure you do some shopping around to see what lenders are charging. A great way to shop around quickly is to shop online. Here's a list that may help you determine if you want to pay a discount point. If any of these apply to you, ask your lender what your discount point options are available to you:
- I plan on staying in my home for the majority of the loans term
- I have a good down payment saved
- I would like to keep my payments as low as possible during the life of my loan