Discount Points: A Smart Way to Lower Your Interest Rate
When you’re getting ready to buy a home, your interest rate is one of the most important numbers there is. Discount points give you a unique opportunity to take control of your interest rate.
Discount points are upfront interest you pay as part of your closing costs in exchange for a lower interest rate. One point equals 1% of your loan amount and typically reduces your rate by about 0.25%. For example: On a $250,000 loan, one point would cost $2,500.
Buying discount points can help you:
- Lower your monthly mortgage payment
- Reduce the total interest paid over the life of the loan
The challenge for many homebuyers is deciding whether an extra upfront payment is worth the long‑term savings.
To find out whether purchasing points makes sense, you can complete a break-even analysis: Divide the cost of the points by the monthly savings. If a $2,500 point saves you $40 per month, it will take five years and two months to break even.
$2,500/$40 = 62.5/12 months = 5 years and 2 months
For a homebuyer planning to stay in the home for a while, the savings can compound in your favor. Otherwise, the additional upfront expense may not provide the value you’re looking for.
GOOD TO KNOW
Almost every mortgage loan includes a standard one‑point origination fee, used to cover the cost of processing the loan. Although the lender will assist you with getting the best rate, the number of points you pay is ultimately up to you.
When used strategically, discount points give you more control over your loan and can help make homeownership more affordable.
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