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- what are discount points?
Paying discount points will lower your interest rate (as well as your monthly payment) over the life of the loan. When you pay a discount point, you are essentially paying part of your interest to the lender up front. One discount point is typically equal to 1% of the loan amount, paid at closing.
- For example, one point on a $100,000 loan would require an up front payment of $1,000. A mortgage's interest rate can often be reduced by one quarter of a percent for every point you pay.
- Keep in mind that paying discount points doesn't reduce the amount borrowed — it simply lowers your interest rate and monthly payment.
When does it make sense to pay points?
Generally speaking, the longer you plan to remain in a property or hold your mortgage, the more advantageous it is to pay points. If you plan to move or refinance your mortgage within the next two to four years, paying points may not make sense. Use our points calculator to estimate your "break-even" time frame, the point in your mortgage payment schedule when you'll start to realize a genuine cost savings from your discount points. Go to mortgage points calculator.
