Whether you're a first-time homebuyer or not, discount points can mystify real estate consumers. Like many aspects of the home buying process, knowledge about discount points does not often come in handy unless you are actively shopping for the best financing terms on a home. Herein lies the value of working with a realtors, education-oriented mortgage lenders, and CPAs: we provide information so that you can make the best decision for yourself. 

If you're just beginning to learn about discount points, read our blog post, What are Discount Points? There is always an opportunity cost to spending your money in a particular manner. The three following factors are important to consider when deciding whether to purchase discount points at closing.

1. How Much Will Lowering My Interest Rate Lower My Monthly Payments?

Each discount point purchased at closing will lower your interest rate between 1/8 and 1/4 of a percent. If your mortgage lender offers you a 4.5% interest rate, and you purchase two discount points, your interest rate for the life of the loan will be 4%. On a $200,000, thirty-year mortgage, this can mean a monthly savings of approximately $59. Over the life of a thirty-year loan, this can represent tens of thousands of dollars in savings, whereas a discount point on a $200,000 mortgage will generally cost $2,000 each.

    2.  How Long Will It Take Me to Break Even on my Mortgage if I Purchase Discount Points?

There are many benefits to purchasing discount points, but they're not always the best option. The up-front cost of a discount point in our hypothetical is $2,000. By purchasing two discount points and lowering your mortgage loan interest by 1%, you will save approximately $59 per month.  You can calculate your break-even date by dividing the cost of your discount points by the dollar amount of your mortgage payment savings. The dividend is the number of months it will take you to break even on your discount points purchase.  

In the event that interest rates decrease, you could refinance your mortgage and obtain a lower interest rate. Furthermore, if you sell your home before your break-even date, you can lose money by purchasing discount points. By calculating your break-even time on purchasing discount points, you can talk with a realtor and CPA about whether purchasing discount points is the best decision for you. 

   3.  How Will Purchasing Discount Points Affect My Mortgage Interest Deduction?

As you may know, homeowners may deduct mortgage loan interest from their personal tax return under certain circumstances: talk to your CPA to make sure you and your home qualify. Naturally, if you purchase discount points and thereby lower your mortgage interest rate, this can have an unintended effect on your tax strategy. 

Work With a Knowledgeable Realtor 

As a realtor and attorney, I talk to clients about how to make deals that meet their best interests every day. If you have questions about the homebuying process, I'd be happy to set up an appointment to talk to you. Use the Contact Us page to request a link to my Calendly. 

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