Deciding Whether or Not to Pay Discount Points on Your Home Loan
Many people pay for points in order to get their mortgage home loan monthly repayment bills lowered. However, paying discount pints is not always a good idea. There are many factors to consider when determining whether or not you should consider paying discount points on your home loan.
What Is a Discount Point?
A discount point is equivalent to one percent of your mortgage home loan. In essence, you can "buy down" your interest rate by paying discount points. You can purchase incremental reductions in the interest rate on your mortgage loan by paying points. One point is an up front payment equivalent to one percent of the total amount of the amount of money you are borrowing.
How Much Can I Save By Paying Discount Points?
Typically, each discount point that you pay will reduce one-quarter of a percentage point off your interest rate. However, this may vary among lenders and loan programs.
Will I Save Enough on Interest to Offset the Cost of the Discount Points?
Even a small reduction in the interest rate on a mortgage loan can result in a significant savings over the life of the loan. If you are planning to stay in your home three years or more without refinancing, it might be beneficial for you to pay discount points to lower the interest rate on your mortgage.
However, if you plan to sell your home or refinance in less than three years, you are not likely to realize any savings as a result of paying discount points. The longer you plan to stay in your home, and keep the same mortgage, the more likely you are to benefit from buying down your interest rate with discount points. Put some serious thought into how long you intend to stay in your current home before you commit to paying discount points.
How Do I Decide?
When deciding whether or not to pay optional discount points on your mortgage, keep in mind that a lower interest rate is not the only factor that should be considered. While the thought of having a lower interest rate is very appealing, don't be blinded by the fact that with discount points, you are paying money up front to reduce your interest rate.
While your mortgage lender can't decide for you, he or she can probably run the numbers for you, to show at what point in the life of your loan you can expect to break even by purchasing discount points. Once you know how long you will need to keep the mortgage before breaking even and then going on to realize financial savings, you are in a better position to make a decision about what is best for you.
This information was presented by your Colorado Denver real estate experts of Automated Homefinder.
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