What Are Discount Points With Regards To Property Buying?

The decision whether or not to pay discount points when buying a home requires some calculation, not speculation! Since a point is 1% of the total loan amount, it's necessary to determine how long you'll live in the house as well as how much interest you'll pay.

To begin with, it's important to realize that discount points can actually benefit both the borrower and the lender, although the immediate benefit seems to be towards the lender because at closing the borrower pays an additional fee to obtain a loan when buying a house.

Needless to say, discount points aren't important to get yourself a home loan. But, the borrower may decide to pay extra money to the lender up-front in order to obtain a lower interest rate over the life of the loan. The lender benefits at closing by receiving more money from the borrower, and for this benefit the lender lowers the borrowers' long-term interest rate by one-eighth to one-quarter percent.

Normally, a borrower is required to pay 1% of the total loan amount for each "point". Meaning, on a $100,000 loan it will cost about $1000 to qualify for a lower interest rate on the same mortgage, to lower it by a small percentage, which is determined on the borrower's financial qualifications. But even a small decrease in the interest rate could save a borrower in excess of $1000 over a 20 to 30 year mortgage.

You'll want to grab your calculator when thinking about paying discount points on a home mortgage loan. And you'll want to consider how long you plan to live in the house, because if you plan on selling it within a few years it's possible that the cost of the discount points will exceed your interest savings. The fact is, you have to compute your payments both ways in order to determine whether paying 1% of the loan amount to lower your interest rate by a fractional percentage is going to represent any actual savings. Follow these steps to make your calculations:

First, calculate the amount of your monthly payment at the original interest rate you will be paying without points; Second, calculate the amount of your monthly payment at the lower interest rate if you do pay one point, or multiple points; Third, deduct the lower amount from the higher amount to find the total savings on your mortgage payment each month; Finally, divide the amount charged for points at closing by the monthly amount saved. The result is the number of months you must keep the loan to come out ahead by paying points.

Now you know the reason and the method to calculate discount points when you are considering lowering your interest rate at closing when you are buying a house.


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Leo Kingston and his wife Paulette own 18002sellhomes in Oklahoma City. They have been helping people sell a home fast for cash for over 20 years in the central OKC area. They offer house owners a way to quickly sell a house without the hassles of having to use banks or Realtors.