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In plain english please, what are mortgage discount points?

By
Real Estate Agent with Sandpoint Realty rain@lakeandhomes.com AB36782

In response to my last post concerning using discount points in home sale negotiations  I received 2 emails asking ....

What are points?  

Points, or "discount points", are a form of pre-paid interest that a person pays to a lender to get a loan at a specific rate. *This is not the same as an origination fee or point

 

When you pay mortgage points it is often called "buying down the loan".  One point equals one percent of the loan amount. Borrowers can offer to pay a lender points as a method to reduce the interest rate on the loan, thus obtaining a lower monthly payment in exchange for this up-front payment. It depends on your lender, but in general, each point will take off about 1/4 to 1/8 of a percent off of your interest rate.

Here is an example of a $200,000 30 year loan

example of discount points paid on a $200,000 loan

Points are tax deductible.

 

Because points are interest-payment related, they are fully deductible on your taxes in the year that you close. 

 

Are discount points good idea?

Mortgage points can add up to valuable savings over the course of your loan but depends on the individual circumstances.  

1. Are you getting the loan for a long term? Figure out if the expense is worth it and how long it will take to break even. Generally speaking, it takes about five to seven years to recoup the cost of paying for points.

2. Do you will have the extra cash at closing as you pay for the points up front. Points are not a fee that you can finance and it does not reduce the amount of the loan.

 

The loan process is often foriegn to the buyer.  After saving up for a down payment and adding in closing costs and other fees, shelling out a few more thousand dollars for points doesn't seem worth it. Usually at the end, most buyers just want to finish the transaction and move into their homes with whatever loan rate they were offered. It may well be worth looking at your finances and your particular situation to see if paying for points is worth doing. 

Posted by

Rain Silverhawk

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Come See Listings or more about Rain Silverhawk at 

http://www.northidahosandpoint.com 

http://www.sandpointlisting.com

 

rain@lakeandhomes.com
Rain Silverhawk Realtor
Sandpoint Realty LLC
1205 Hwy 2 STE 203 B |  Sandpoint, ID. 83864
Phone (208)  610-0011  

 

Comments (1)

Mark Don McInnes, Sandpoint-Idaho
Sandpoint Realty LLC - Sandpoint, ID
North Idaho Real Estate - 208-255.6227
Great information Rain. You must have been thinking of me when writing this one. Easy to read and understand. Keep the good information coming...Mark
Sep 07, 2014 11:39 PM