Discount points are a fee paid to the lender in order to reduce the interest rate on the mortgage. A "point" is one percent of the loan amount; in exchange for paying one or more points, the interest rate on the mortgage may be reduced by an agreed upon amount. Since this fee can easily run in the thousands of dollars, it would make sense to first determine if it is a good idea to pay the lender to reduce the interest rate.
The key to this equation consists of two parts – how much the monthly payment will be reduced if you pay the points and how long you will keep the mortgage. Most people have some notion of how long they intend to remain in the house they are buying, but it is more difficult to determine how loan you will keep the loan. After all, if interest rates drop dramatically, you may elect to refinance the mortgage, which would retire the existing one.
When closing approaches, and you are considering "locking in" your interest rate, ask your lender if you can reduce the rate by paying points. After he or she outlines the available options, ask them how much the monthly payment would be reduced if you paid the points. After that, divide the cost in points by the monthly savings. The answer will be the number of months that you will have t keep the loan to break even. If you think you will keep the mortgage for that long or longer, then you should probably pay to reduce the interest rate if you can afford to do so.
Even a savings of $20-30 per month can add up over the life of a 30 year mortgage, so it is well worth your while to see if you can lower the payments. Why pay more than you have to?
About the Author:
©Copyright 2005-06 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including http://www.homeequityhelp.net, a site devoted to information regarding home equity lending.
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