Discount Points
Discount points are upfront fees paid to the lender at closing in exchange for a lower interest rate. One point equals 1% of the loan amount and typically reduces the rate by 0.25%. Paying points 'buys down' your rate and makes sense if you plan to stay in the home long enough to recoup the upfront cost through lower monthly payments.
On a $400,000 loan, one discount point costs $4,000 and might reduce your rate from 7.00% to 6.75%, lowering your monthly payment by about $65. To break even, you'd divide $4,000 by $65/month = roughly 61 months (about 5 years). If you stay in the home longer than 5 years, paying points saves money. If you sell or refinance sooner, you lose money on the points.
Discount points are tax-deductible in the year they're paid for a home purchase (subject to limits), which can improve the effective cost. For refinances, the deduction is typically spread over the loan's life rather than taken all at once.
Don't confuse discount points with origination points. Origination points are a fee for processing the loan and don't reduce your rate. Always ask your lender to clarify which type of 'points' they're quoting, and request a loan comparison showing the rate and total cost with and without points.
Key Takeaway
Discount points are upfront fees paid to the lender at closing in exchange for a lower interest rate. One point equals 1% of the loan amount and typically reduces the rate by 0.25%. Paying points 'buys down' your rate and makes sense if you plan to stay in the home long enough to recoup the upfront cost through lower monthly payments.
Related Terms
Frequently Asked Questions
They're worth it if you stay in the home long enough to recoup the upfront cost. Divide the point cost by your monthly savings to find the breakeven month.
Typically 0.25%, though this varies by lender, loan type, and market conditions. Always ask your lender exactly how much rate reduction you get per point.
Yes, discount points on a home purchase are generally deductible in the year paid. For refinances, the deduction is spread over the life of the loan. Consult a tax advisor for your situation.
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