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What Are Mortgage Discount Points?

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Let’s face it—buying a home can seem overwhelming; especially when you encounter complicated mortgage lingo and terms. “Discount points” is one of those terms, and it will probably come up at least a few times during closing.

What are discount points?

Simply put, mortgage discount points are fees that reduce interest rate on mortgage. Each point is typically $1,000, and the amount it will reduce your interest rate varies with each lender. As a general rule, a discount point will lower your interest rate by up to .25%. The more points you buy, the lower your interest rate will be.

What are the benefits of discount points?

Mortgage discount points are not mandatory, but they can be beneficial in a number of ways:

• They lower your interest rate, saving money in the long run on the cost of the loan
• They result in lower monthly payments
• They are 100% tax-deductible for the year in which they were purchased

Should you use discount points?

Discount points have the potential to save you money, but there are a few things to consider before you decide to purchase them at closing:

How long you plan to own your home. Let’s say you spend $3,000 on discount points, which saves you $50 a month on your mortgage. Using these figures, it would take you 60 months to break even. If you don’t plan on being in your home long enough to recoup the money you spent on discount points, or if you plan on refinancing within that time, it may not be the best move.

Your finances. Spending an additional two or three thousand dollars at closing that you didn’t budget may put a strain on your finances, or lower your savings account to a level you’re not comfortable with. Mortgages are expensive transactions to begin with, so for some people, mortgage interest points aren’t even an option.

Mortgage discount points may be confusing, but they have the potential to save you a great deal of money over time. Weighing the pros and cons carefully can help you make the right decision.