Are you looking for creative solutions to make buying a home today affordable? With rising interest rates, some buyers are concerned about how to afford the home they want. One of the solutions available today is buying discount points. To learn more about what discount points are and how they work, keep reading.
If you’d like to talk to a loan officer about pre-qualification, we are ready to help! Contact us any time.
What are discount points?
Discount points are fees a borrower pays to a lender to lower the mortgage interest rate. Your interest rate is determined by some things that are within your control, like your credit score, debt-to-income ratio, and employment history, as well as some factors that are beyond your control, like the economy and the Federal Funds Rate (the interest rate banks charge each other to borrow money overnight).
In some cases, the interest rate you qualify for, even as a highly qualified borrower, may be higher than you’d like. This is where discount points can come in handy, allowing you to pay upfront to lower the cost of borrowing money. You can think of discount points as prepaying your mortgage interest, which will benefit you more the longer you own the property.
How much do discount points cost?
The cost to purchase discount points will vary some depending on the current market conditions, the type or mortgage, and your lender, but you can generally expect that each 0.25% rate reduction will cost 1% of the amount borrowed. For example, on a $500,000 loan, each discount point would cost $5,000.
Discount points do not have to be purchased as whole numbers. You can opt to purchase half a discount point, which would cost $2,500 for a 0.125% rate reduction in our example above. While that percentage may sound minuscule, remember that interest rate reductions of any size can make a significant impact on your monthly payment. The longer you plan to live in the home, the more you will benefit from investing in discount points upfront.
Who pays for discount points?
The party paying for discount points can be either the buyer, the seller, or a combination of the two. Buyers can also use gift money to pay for discount points, such as an inheritance or gift from a family member.
How much will I really save with discount points?
Let’s say you buy 2 discount points on a $500,000 loan, paying $10,000 upfront to reduce your interest rate by 0.5%. If your interest rate went from 7% to 6.5%, you would save about $170 per month, which is over $61,000 over the life of a 30-year loan. In this simplified example, your $10,000 upfront cost will begin to truly pay off after about 5 years, so you could reasonably decide that this upfront investment would be worthwhile in a home you plan to live in beyond that timeline.
To figure out how much you would save, put this same formula to work on your east scenario. Calculate your monthly payment with the interest rate you have been approved for, and then play around with the amount you would pay for different decreases in that rate and how much it would save you each month. Not sure how to do this? We are always here to help, so contact us any time to learn more.
How can I learn more about discount points?
To learn more about discount points, or other creative solutions to get you into the home you want, contact us any time. Our client testimonials speak for themselves: we are ready to help you have the best home buying process possible. For more information on Loan options in Mission Viejo and California please contact me anytime.
If this post was helpful, these might even be more so!
- 50 Ways You Might Get Declined for a Mortgage
- Pros and Cons of Applying for a Mortgage with your spouse
- 5 Steps to Protecting Your Credit Score During a Pandemic
- 5 Things NOT to Say When Applying for a Mortgage
- What to Do if You’ve Been Denied for a Mortgage
- Why Lenders Offer Different Mortgage Interest Rates to the Same Applicant
- New Mortgage Options for Teachers and First Responders
- Reasons Mortgages Get Held Up in Writing
- What Does a Mortgage Lender Look for When they Ask for Bank Statements?
- 3 Items Lenders Hope Not to Find in Bank Statements