Discount points, also known as mortgage points, are fees paid to a lender at closing to lower the interest rate on a mortgage. Each point costs 1% of the total mortgage amount, and typically lowers the interest rate by 0.125% to 0.25%, depending on the type of mortgage. For example, if you have a $250,000 mortgage, one discount point would cost $2,500, and if the interest rate without points was 3.5%, paying one point might lower the rate to either 3.375% or 3.25%.
Discount points can be a good option if the savings from lowering your interest rate outweigh the cost of paying for the point(s). However, its important to consider how long you plan to own the home and the time it will take to recoup the cost of buying points. If you plan to keep the mortgage for a long time, paying points now and getting a lower interest rate can save you money over the long run.
Its important to note that discount points are optional and not required to obtain a mortgage. Additionally, some lenders may use the term "points" to refer to any upfront fee that is calculated as a percentage of your loan amount, whether or not you receive a lower interest rate. Therefore, its important to clarify with lenders what the impact on your interest rate will be if you pay fees, points, or discount points connected to the initial interest rate.
