Discount Points

Discount points, often simply referred to as points on a mortgage loan can be advantageous for a borrower that understands their purpose on a mortgage loan and can see the appropriate return on their up front investment. For most mortgage shoppers the idea of paying pointes points brings on a negative reaction. There is a concern that points are an unnecessary charge that is added to their closing fees by the mortgage lender. In some cases, this may be true, but discount points can also work in a borrowers favor if they understand the purpose and are dealing with an ethical lender. Discount points are equal to percentages, one point is one percent of the loan balance. On a 100k loan, one point is one thousand dollars.

It is important to understand that a lender may charge discount points for two distinct reasons. A lender may charge a borrower discount points relating to a loans risk. For example if a borrower is obtaining a loan on an investment property, refinancing their mortgage for the purpose of taking cash out of their home, or they have a lower credit score. In all of these scenarios a borrower may be charged discount points or receive a higher than market interest rate or both.

Discount points that are used for the purpose of securing a lower mortgage rate for the loan term, can be beneficial if they are properly explained and the borrower understands the investment and break even with the discount points. For example, a borrower who is financing 100k may agree to pay three points ($3000) to receive a loan interest rate that is one full percent lower, for example going from 6% down to 5% for the life of the loan term. The monthly savings in this example would be $60 each and every month, so the time to recoup the up front investment of the discount points would be 50 months and over a thirty year loan term this would provide a net return of  ($21,600 -$3000) $18,600 which would be a great investment for a borrower who kept their loan for the entire term.