What Are Discount Points?

By
Real Estate Agent with GreatWest Realty DRE# 00827565

Often home buyers who are obtaining a mortgage for a newly purchased home, will ask their GreatWest GMAC Real Estate Professional, "What are points?"

The answer - Each point or discount point, as real estate professionals and mortgage lenders often refer to them, are equal to 1% of the loan amount.  For example, on a $100,000 loan, one discount point equals $1,000.  And ½ discount point for the same loan would be $500.

Points are paid to a lender at closing in order to lower the mortgage interest rate.  Although "discount points" are a part of your closing costs, they are not considered loan fees.  Discount points are an optional way to buy the interest rate up or down.

Buyers sometimes wonder how much buying a point will lower the interest rate?  Typically, each point paid on a 30-year loan will lower the interest rate by 0.125%.  That means a 7.5 percent rate would be lowered to 7.375 percent.

Depending on how much lower of an interest rate you wish to obtain, the more discount points you will be required to pay.

Usually if a buyer is going to retain ownership of their home for a period less than 3 - 4 years, the benefit from paying points, to buy down the interest rate, doesn't compute in savings.  However, for a long-term homebuyer, the savings from paying points at the origination of the loan, can become significant over the course of years of ownership in the home.

If you are a homebuyer, feel free to query your GreatWest GMAC Real Estate professional with your questions about real estate loans and mortgages.

Written for GreatWest GMAC Real Estate
by: Myrl Jeffcoat

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Rainer
41,980
Greg Hampton
Re/Max Around The Mountains - Blue Ridge, GA
North Georgia Mountain Property,Blue Rid
They are points you get for buying 12 packs of adult beverages, that you can apply to your monthly payment.
Apr 23, 2008 01:12 PM #1
Rainer
68,404
Steven Keefe
Coldwell Banker Sky Ridge Realty - Lake Arrowhead, CA

It has been my experience that each point on a 30 year fixed lowers the rate 1/4% for the first couple of points then diminishes from there.

 

 

Apr 23, 2008 01:25 PM #2
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Rainmaker
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Myrl Jeffcoat

Greater Sacramento Real Estate Agent
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