How do discount points work with lending?
Discount points are fees that a borrower may choose to pay in order to lower the interest rate on their loan. Discount points are typically expressed as a percentage of the loan amount and are paid at the time of closing. One discount point is equal to 1% of the loan amount.
For example, if you are taking out a loan for $100,000 and are offered the option to pay one discount point, you would need to pay $1,000 in points at closing. This payment would result in a corresponding reduction in the interest rate on your loan. The exact reduction in the interest rate will depend on the terms of your loan and the lender's pricing policies.
Discount points can be a good option for borrowers who are planning to stay in their home for a long period of time and want to take advantage of a lower interest rate. By paying points upfront, borrowers can potentially save money on their monthly mortgage payments over the long term. For example, if you are taking out a 30-year mortgage and are able to lower your interest rate by 0.25% by paying one discount point, you could save thousands of dollars in interest over the life of the loan.
However, it's important to carefully consider the pros and cons of paying discount points before making a decision. While paying points can potentially save you money in the long run, it may also require a significant upfront payment that may not be feasible for all borrowers. Additionally, if you are planning to sell your home or refinance your mortgage in the near future, you may not be able to recoup the cost of the points.
Overall, discount points can be a useful tool for borrowers looking to lower the interest rate on their loan and save money over the long term. However, it's important to carefully evaluate your financial situation and consider the long-term implications of paying points before making a decision.