What are Mortgage Discount Points?

This is a common question among buyers. You may also hear them referred to as just ‘points’ or ‘discount points’.  Think of a point as prepaid interest. One point equals 1% of the loan.  On a $200,000 loan one point would be $2000.  It is referred to as prepaid Interest because paying a point up front at closing reduces your interest rate for the life of the loan.  Hence, the PREpaid name. You may also hear the term ‘buy down’. Paying a point upfront is BUYING down the rate, the same thing as PREpaying interest - it’s just another term for it that can lead to confusion. Of course, you can pay more than one  point if you want to bring your interest rate down further.  

So why would you even want to do this?  It’s not always the best plan. In fact, when I sell homes in the Dayton, Ohio area I don’t see a lot of this but there are instances where it makes sense. If you feel you’ll be in the home for just a few years you would be wasting money buying down the rate and not being there long enough to recoup the cost of the upfront points. It may be a better plan to just put more toward the down payment and have a smaller loan.  

This is where speaking with a good loan officer can benefit. They can run break-even scenarios for you and figure the best plan. As an active Realtor in the Dayton area I can direct you to a lender that can help.