Posted: 09/12/2016

If you are entering the home-buying process, one question you may want to have answered is whether using discount points to lower your interest rate is an option for you.

Discount points, which are purchased through a one-time, up-front payment, are offered by lenders to lower the interest rate over the life of a loan. This can make the loan more affordable from a long-term perspective.

Here is how it works. For a $200,000 loan, the breakdown on the cost for discount points may be as follows:

  • 1 point: $2,000
  • .5 points: $1,000
  • .25: $500

In general, you can expect around a .25 percent reduction in your loan rate for every point purchased. So you must ask the question: Are discount points worth the cost? More importantly, when will it be worth the cost? It may very well be a good investment in the long-term even though the monthly savings yielded by buying a point is a very small fraction of your upfront financial commitment. But it may take years before reaching the “break-even” point.

In the example highlighted above, spending $1,000 for .5 discount points could hypothetically save you approximately $16 per month. What that essentially means is waiting 63 months to recoup that upfront payment.

That threshold may be appealing to prospective homeowners who are in it for the long haul. So sit down and crunch the numbers when making a decision like this.

One thing to consider is your past mortgage and rental history. Do you tend to stay in the same home for an extended period of time? It may be difficult to look 15, 20 or 30 years down the road with respect to your living situation, but it’s that long-term thinking that you’ll have to deliberate if you’re looking into a lower interest rate through discount points.

Analyzing this strategically may uncover that a 30-year mortgage would make more sense to purchase discount points toward than a 15-year loan.

For 20-plus years, Guarantee Mortgage has been helping California families finance their homes and navigate the intricacies of financing real estate in California. We fund more than $2 billion in loans each year, and want to help you fund your dream as well.

To better explore your mortgage options – whether for a home purchase or refinance – give us a call at 866-612-5050 or request a free consultation with a  Loan Advisor.

*The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation. For more information please visit our Disclosures page:  apmortgage.com/disclosures