VIDEO: The Truth About Discount Points

Matthew Gunn By Matthew Gunn



Nearly every home buyer since the introduction of the home mortgage has been in search of the lowest interest rate. Lower interest rates typically yield savings for the borrower, but this is not always true. When considering the purchase of discount points to lower the interest rate on a loan, you need to understand exactly what you’re getting for your money in order to make the best decision.

A discount point allows you to lower the available interest rate by a certain percentage by paying an upfront fee. For example, to reduce the interest rate by .25%, you may have to pay 1% of your loan amount. So saving .25% on a $150,000 loan could cost you $1,500.

Here are a few things to consider:

How many months of payment savings will it take to pay back the upfront fee?

Loan without Discount Point:

$150,000 loan amount.

Principle and interest at 4% = $716.12/monthly mortgage payment.

Loan with Discount Point:

$150,000 loan amount.

Purchasing a discount point at 1% of $150,000 = $1,500 to yield a .25% lower interest rate.

Principle and interest at 3.75% = $694.67/monthly mortgage payment.

As you can see, the difference in these scenarios is $21.45/month. Recouping the initial $1,500 you spent to buy down the rate would take 5.8 years ($1,500/ $21.45= 69.9 months/12 months= 5.8 years).

How long do you plan to live in your new house? 

If you don’t plan on staying for the amount of time it will take to recoup your discount point investment, it might be a better idea to use your money for something with a better return. For example, you could pay down high-interest credit card debt which may yield better interest savings than the $21.45/month you would save in the example above.

When reviewing the options available to you as a potential homebuyer, it is important to consider whether purchasing discount points would be the right decision for your specific needs. It is always a good idea to visit with your mortgage loan officer to discuss these options early in the home buying process.