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SUBMITTED ILLISTRATION
By Johanna Gómez and Lisa Hamilton
Discount points are a type of prepaid interest or fee a mortgage borrower can purchase that will lower the amount of the interest rate on a mortgage loan. Each discount point costs 1 percent of the total loan amount and it generally lowers the interest rate by one quarter of one percent.
Facts to know
·Discount points are a one-time fee.
·The fee (points) is paid upfront at closing time. Points can be paid for a new mortgage or refinance.
·During a new home purchase the fee becomes part of your out-of-pocket closing costs.
·During a refinance the fee can be added to the loan balance.
·Discount points are a beneficial option for those borrowers who intend to hold a loan for a long period of time.
·Purchasing points is not useful for those who intend to sell or refinance before they recoup the upfront fee paid or reach the break-even point.
·The Internal Revenue Service (IRS) allows discount points to be tax-deductible for the year they were paid, since they are considered prepaid interest on the mortgage.
Understanding discount points and how they affect your loan
Here is an example to demonstrate how discount points are beneficial if you plan to keep your home for a long time. On a $225,000 loan, each point would cost $2,500. If the interest rate on the mortgage is 4 percent and each point lowers the interest rate by 0.25 percent, buying two points costs $5,000 and results in an interest rate of 3.50 percent. At 78 months of payments, you will have recovered your cost or reached the break-even point. On a 30-year loan, the borrower will save $22,980 in interest costs.
Who benefits?
As you can see, both the lenders and the borrowers can benefit from discount points. The lenders will immediately receive upfront payment on the loan. The borrowers, on the other hand, will have to wait to see the benefits. However, understanding this calculation will help you determine the break-even point and the long-term savings. It is important to consider the facts at the moment you are selecting your loan. Discover if paying discount points is for you by reviewing all options before making the final decision.
Take away
Remember when buying or refinancing a home, there are a lot of steps in the process. Without doubt there are also many costs involved. One of the costs to be considered is whether buying discount points is the right choice for you and your family. Always consider your short term and long-term goals when calculating the potential savings of lowering your interest rate through discounts points. It is important to determine the facts and consult with your loan professional to achieve a successful outcome. Stay safe!
Johanna Gómez, is a UF/IFAS Family and Consumer Sciences, Faculty Extension agent in Osceola County in collaboration with Lisa Hamilton, UF/IFAS Family and Consumer Sciences, Faculty Extension Agent in Volusia County. Need help? Contact your local UF/IFAS Extension office. If you are interested in more of our programs, contact us at UF/IFAS Extension Osceola County at 321-697-3000.
For more information about our programs visit us at http://sfyl.ifas.ufl.edu/osceola/.
