What are mortgage discount points and how can they help today's buyers?

Key insights:

• As interest rates rise, buyers may be concerned about their diminished buying power.
• To combat these rising rates, some buyers are seeking to purchase mortgage discount points, which can lower the overall interest rate on your mortgage.
• Mortgage discount points can be the right option for buyers who plan to stay in a home past the “break-even point,” but borrowers should speak with their lender about the pros and cons before making a final decision.

After years of historically low interest rates, buyers may be stunned to see that rates are rising quickly. This will not only lead to buyers paying more over the life of their loan, it can also impact the total loan amount for which they could qualify. As we reported earlier this year, a 1% jump in interest rates can be equivalent to an 11% reduction in buying power for an aspiring homeowner.

So, what can hopeful buyers do, aside from maintaining good credit and saving as much as possible for their down payment? Experts say it may also be time to take advantage of mortgage discount points.

What are mortgage discount points?

Mortgage discount points — also called discount points or mortgage points — are fees that a homebuyer pays directly to their lender in exchange for a reduced interest rate.

Each point that a homebuyer purchases typically:

• Reduces their interest rate by .25%
• Costs 1% of the total mortgage amount

In other words, if a buyer was taking out a $400,000 mortgage and rates were set at 5%, then they could pay $4,000 for one mortgage point. This investment of $4,000 would (in most cases) reduce their interest rate to 4.75%, allowing them to save on interest over the life of the loan.

How much do you end up saving by purchasing mortgage points?

Purchasing discount points may end up saving you significant money over the loan term. Here is an example of how much a homebuyer would save, over the course of 30 years, by purchasing one (1) point during a time when rates are set at 5.5%.

_{* Sample points, interest rates, and APRs are for illustrative and educational purposes only and are not an actual rate quote, pre-qualification or commitment to lend. Actual rate buy-down per point varies by loan program and market conditions. Interest rate and annual percentage rate (APR) are based on current market conditions as of 4/25/2022, are for informational purposes only, are subject to change without notice and may be subject to pricing add-ons related to property type, loan amount, loan-to-value, credit score and other variables. Estimated closing costs used in the APR calculation are assumed to be paid by the borrower at closing. If the closing costs are financed, the loan, APR and payment amounts will be higher. If the down payment is less than 20%, mortgage insurance may be required and could increase the monthly payment and APR. Contact us for details. Additional loan programs may be available. Accuracy is not guaranteed and all products may not be available in all borrower's geographical areas and are based on their individual situation. This is not a credit decision or a commitment to lend.}

_{** This is the cost of monthly principal and interest only. Taxes, property insurance, and mortgage insurance are NOT included in this example.}

Who should buy mortgage discount points?

Not everyone is a candidate for buying discount points. If you are cash-strapped and unsure how you’ll afford a down payment, for example, then buying mortgage points may be out of the question.

However, it may make the most sense to “buy down the rate” if you are:

• Buying in an environment where rates are going up and are not expected to go down in the near-term.
• Taking out a loan with a fixed-rate mortgage. The points may then allow you to reduce your rate for the life of the loan.
• Planning to own the home after you reach the “break-even” point, or the time it will take to recoup the cost of buying points.

Other common questions about discount points

Can buyers purchase more than one discount point?

Yes, it’s possible to buy more than one discount point, but each lender will have their own limitations for how many discount points they allow.

Should I put more money into a down payment, or buy mortgage discount points?

There’s no easy answer to this question, because your financial situation is so different from every other buyer and borrower out there. Your agent or lender will be able to help you evaluate the benefits of putting down a larger down payment (and borrowing less overall) or buying down the rate (so your rate is lower for the life of the loan).

Are mortgage points tax-deductible?

If you itemize your deductions (rather than taking the standard deduction), you may be able to claim a deduction for your discount points. Remember, though, your taxes reflect your personal financial situation, so we advise speaking to a tax specialist about the tax consequences of discount points.

Get help navigating the mortgage process

As with all mortgage-related activities and decisions, it’s important to get the personalized help of your home mortgage consultant when making a decision about purchasing mortgage discount points. For help getting in touch with a mortgage consultant near you, reach out to Edina Realty or your agent today.

_{Points may not be the best option for all borrowers. Contact your mortgage consultant to determine the best loan option for you.}

_{Not all buyers will qualify. Prosperity Home Mortgage, LLC does not offer financial advice. This information is provided for informational purposes only and does not constitute legal, tax, or financial advice.}

_{Edina Realty Mortgage is an affiliate of Edina Realty. See Affiliated Business Arrangement Disclosure Statement}

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