Discount points, also called mortgage points, are prepaid interest costs you can pay at closing to permanently lower your interest rate. They typically lower your interest rate anywhere from 0.125% to 0.25%. You can usually receive a lender credit for them, too.
How to Calculate Discount Points
The best way to decide if it makes sense to buy discount points is to figure out how long you plan to live in your new home and how much money you can afford to spend on them up front. Then, you can use a calculator to find out how many months it will take for the cost of discount points to pay for themselves.
If you can afford to pay for them upfront and plan to live in your home for more than a few years, they could be worth it. But if you plan to move frequently, the savings won’t be enough to cover the cost. You can also compare a discount points loan with a larger down payment, which could bring your interest rate down and avoid the need for mortgage insurance.
The break-even point is the number of months you need to save in order to make up the cost of discount points and get a positive net interest savings. You can calculate this with a simple calculation, or with a more sophisticated one that includes your loan balances on multiple loans.
This calculator is based on data from Icanbuy and uses current mortgage rates to give you an idea of how much you’ll pay in monthly payments for discount points, plus the net interest savings. It will also let you see which loan options have the lowest points and how to compare them to your lender’s offers.
Do I Need Discount Points?
Buying discount points is a good financial decision if you plan to live in your home for more than 10 years. It’s also a smart choice if you plan to stay in your home for a long time because the savings will grow over time. However, it’s not a great idea if you plan to sell your home or refinance your mortgage within two years.
How to Calculate Lender Credits
If your mortgage lender gives you a lender credit, the lender is essentially paying your closing costs for you. This credit may appear on lenders’ worksheets as negative points (i.e., a lender credit of $1,000 on a $100,000 loan is described as negative one point).
How to Calculate Tax Deductibility
Because they’re prepaid interest, your mortgage points are tax deductible. Consult with a tax advisor to find out whether the mortgage points you buy are deductible in your state and what tax consequences you might face.
When to Pay Points
A discount point can be a good deal for home buyers who are looking for a lower interest rate and want to get the ball rolling on their financing sooner. They’re also helpful for first-time homeowners who don’t have much money saved up for a down payment.