Number of Discount Points Depends on Length of Time You Keep the Mortgage

When you purchase a home you will be faced with the decision on how many discount point should I purchase when buying my new home.  Discount points are associated with the interest rate you will be charged for your loan amount.  Points are referred to as prepaid interest.  If the points are paid by the buyer, the buyer is entitled to use the amount as a tax deduction from his taxable income in the year paid.  One point is equal to 1% of your loan amount.  For example, if the loan amount is $300,000 you will pay an additional $3,000 at closing.  Also remember, there is no direct relationship between interest rates and points.  One point can reduce your interest rate approximately ¼ percent. Now the question becomes how many points should I buy?  First, calculate your monthly mortgage payment using no points.  Second, make several calculations using different number of points to determine your monthly mortgage payment.  Then compare step 1 calculation to step 2 monthly mortgage savings results.  During this process you will determine the number of months it will take you to pay off each point calculation.  Also, estimate how long you plan on living in the home.  After performing the above calculations you will have a better idea how many points you should buy to reduce your interest.  There are couple of other things to keep in mind: first, how much available liquid cash do you have to buy down the interest rate, and second, remember everybody situation is different, and therefore what is the good plan for someone else is not necessarily best for you.