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Tuesday, March 26, 2013

Discount Point FAQ

From Janet Wickell, former Guide

Buying Points to Lower Your Interest Rate, It’s Not Always a Good Idea

Discount points are fees paid to a lender at closing in order to lower your mortgage interest rate. While buying points is sometimes a good decision, many times the purchase costs you more than it saves.

How Much Do Points Cost?

The cost of each point is equal to one percent of the loan amount. For instance, for a $100,000 loan one discount point equals $1,000.

How Much Does Buying a Point Lower Interest?
Each discount point paid on a 30-year loan typically lowers the interest rate by 0.125 percent. That means a 7.5 percent rate would be lowered to 7.375 percent if you purchase one point.
Paying for points lowers your interest rate, because the lender receives the income in a lump sum at closing rather than collecting the interest as you make payments on your loan.

Should I Buy Points?
Whether or not paying points makes sense for you depends in part on how long you plan to keep the loan. Use a mortgage calculator to help you decide.

1. Calculate the amount of your monthly payment at the interest rate you will be charged if you do not pay points.
2. Calculate the amount of your monthly payment at the lower rate if you do pay points.
3. Deduct the lower payment from the higher payment to find the amount saved each month.
4. 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 break-even on paying points.

Break Even Example

$100,000 Loan - 30 Year Term
· 7.5% Interest, no points = $699.21 monthly payment
· Buying 1 point for $1,000 = monthly payment $690.68
· Monthly Savings = $8.53
· $1000 / $8.53, = 117 months

Your break-even point is 117 months—or nearly ten years to recover the cost of buying the discount point (considering only the simple calculation of those funds at today’s value).
Do you plan to stay in the house that long? If not, buying points might not make sense.

Slightly Lower Principal Balance
If you look at amortization schedules to compare the two loans, you’ll see that the lower interest loan does have a slightly lower principal balance at the end of 117 months, $87,024 versus $87,259 for the 7.5 percent loan. So you might want to consider that savings to help you decide whether or not to buy points.

Can the seller pay for my discount points?
Probably. Talk with your lender about what’s allowed with your loan. The seller will probably want a higher sales price if paying a portion of your fees, but you can move into the house with less cash at closing.

Are discount points tax deductible?
Yes, points paid for residential real estate are tax deductible in the year they are paid. Buyers may deduct the amount paid even if the seller pays for the points at closing.

Are discount points the same as an origination fee?
An origination fee is a fee charged to process your loan. It typically costs the same as one point, but it is a different type of fee. Ask each loan officer or mortgage broker you talk with if you will be charged an origination fee.

My name is Scott Grebner and I have been helping my clients realize their own personal real estate dreams. Real estate is a relationship-based business that works best when client relationships are built on trust and confidence. My goal is having clients be completely satisfied with the professional and caring service they have received.

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