Mortgage Discount Points: Are They Worth It?
This 2017 alone, over 6 million people are expected to buy a new house. According to data, around 1/3 of them will be first-timers.
But, there is something that every home buyer struggles when trying to shop for a mortgage, and this is whether or not they should pay discount points.
These discount points tend to be very expensive, and at times, it can increase the amount of cash you need during closing.
However, for homebuyers, there are some instances when it is beneficial to pay discount points, particularly when you can convince the seller to pay your set closing costs.
So, should you or should you not pay points? The answer will depend on your situation.
Mortgage Discount Points Defined
Mortgage discount points are the upfront and one-time closing cost that discounts your existing mortgage rate.
These are optional and common, and paying a single point will usually lower your quoted interest rate by as much as 25 basis points.
The cost of a single point is equivalent to 1 percent of your loan amount.
These points are tax deductible as well in most cases.
Since paying discount points can get you access to reduced mortgage rates, once you pay them, is commonly referred to as buying down the rate.
Is It Worth It to Pay Discount Points?
Mortgage lenders usually discount one quarter percentage point for each discount point you pay, and lenders will usually allow as much as 4 points paid at the closing.
Paying 4 points in general will discount your rate by as much as 100 basis points, something that is big enough already. But, the mere fact that you can pay these points doesn’t really mean that you should do so.
Can You Afford Discount Point Cost Together with Loan Closing Costs?
Being able to discount your mortgage rate through mortgage discount points is just a form of luxury, and not really a necessity.
Thus, this will move you to a somewhat unsafe financial position for paying the discount points in addition to whatever mortgage closing costs will be for your state. it is best that you allow this opportunity to pass.
However, take note that your real estate agent can negotiate the closing costs to the home purchase contract. The method of letting the seller pay your closing costs is called seller concessions.
How Many Years Will You Need the Mortgage?
Aside from the cost considerations of paying the discount points, there is also the question of value of paying the mortgage discount points.
It might make sense to pay a fee to reduce your mortgage rates over a time window of 5, 10 or 30 years. However, when you plan to move after several years, or refinance the loan, there is a chance that you will never be able to recoup your initial investment.
For instance, if you will use an FHA loan to buy your house, and you expect that the increasing home value is going to help you in refinancing your FHA MIP away, it could be wasteful to pay the discount points on your loan.