Discount points are essentially prepaid interest on your loan, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or .125) of a percentage point.
Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them. (Be sure and consult a CPA on any tax implications.)
They can be risky, however, in that if you don’t stay in the home long enough to recoup the cost of the points, you will have overpaid for the loan. Alternatively, if you take a higher interest rate, the lender may pay some or all the closing costs, thus reducing the amount of money required at the closing table.
When shopping for loans, it’s a good idea to ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Keep in mind that points, closing costs and interest rate are a package – if you change one variable, the other two automatically adjust.
Lisa Miles: NMLS #: 286749; CO Lic #: LMB100018629
Julie Whalen: NMLS #: 252298; CO Lic #: LMB100018008
Company NMLS #: 3274. Regulated by the CO Division of Real Estate. Guild Mortgage is an equal opportunity housing lender.
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