Discount Points
Before obtaining good mortgage rates a borrower must understand what actually is included in a ‘mortgage interest rate’. There are many factors that affect all mortgage rates in every mortgage transaction. Discount points, origination fees, Yield Spread Premium, and 3rd party fees are a few factors that can change your interest rate. This information will help a first time home buyer determine the different between an origination fee, and a discount point.
Discount points is prepaid interest that is used to lower a mortgage rate. They are tax deductible, and can help lower your monthly payments. One discount point is equivalent to 1% of your mortgage loan amount.
For example:
Purchase Price $200,000
Down Payment $40,000
Loan amount $160,000
Discount points 1% or $1,600 of your mortgage loan amount.
Discount points MAY lower your mortgage rate by 0.5% for every point paid.
Every lender is different, and may only lower your mortgage rate by 0.25-0.375%.
If your current mortgage rate was 6.5%, and you paid one discount point, then your rate can go as low as 6.125-6.25%. By lowering your rate, you will also be lowering your monthly mortgage payment. The one time closing cost will be 1,600, and will be recovered between 3-4yrs. The way to calculate this is to subtract the higher mortgage payment from the new payment, and divide it by the 1,600.