According to Shashank Shekhar at The Balance, “Discount points are one of the most confusing aspects of the mortgage process for many borrowers. Discount points are fees specifically used to buy down your rate. A settlement statement, shows discount points are sometimes called “Discount Fee” or “Mortgage Rate Buydown.” Usually, the practice of buying discount points is called Buying Down the Rate. One discount point carries a cost equal to one percent of your loan size. Discount points are different than your “origination fee,” the fee that the mortgage lender charges to complete the loan.
‘Though most borrowers usually opt for a higher mortgage rate to avoid paying closing costs when buying a home or refinancing, some savvy homeowners will pay the one-time fees and take a lower interest rate to save money over the long term.
Of course, this strategy only really makes sense if you plan to stay with the mortgage for a long period.”
When you meet with your lender, you might want to ask about buying mortgage points or as some call it, buying down the rate. Points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. A point is equal to 1% of your mortgage amount (or $1,000 for every $100,000).
Let’s take an example of a $300,000 mortgage. Assume a lender offers you a rate of 4.5%. Each point, in this case, is $3,000. If you bought a 3 point discount for $9,000, you would reduce the interest rate by about ¾ to 3.75%. The points would be in addition to your down payment and closing costs. Here is a buying down the rate calculator.
“Most lenders provide the opportunity to purchase anywhere from zero to three discount points. Buying discount points can decrease your overall mortgage payments. It is important to note, however, that when lenders advertise rates, they often show a rate based on the purchase of points. If you itemize your taxes, discount points are tax deductible on Schedule A.”
Should you buy down your rate? You need to decide how long you want to be in the house because you want to look at the cost of the points and how much a month your mortgage payment will go down, Suppose, you could save $131 a month by buying down the rate. Dividing $9,000 by $131 per month equals 68 months. Sixty-eight months is five years and eight months. That’s a good deal for you if you plan to live in the house for some time.
Then you must decide if you have the money in addition to the down payment to buy down your rate. Some first time home buyers barely have the money for the down payment and the monthly payment. If the payment is just too high and you can’t buy down your rate, you might consider if your eyes are bigger than your stomach as mama used to say.
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