How do Discount Points work?
Discount points are a type of fee that you can pay when you take out a mortgage to buy a home. Each discount point is equal to 1% of the total loan amount, and they are used to buy down the interest rate on your mortgage. Essentially, by paying discount points, you are pre-paying a portion of your mortgage interest upfront in exchange for a lower interest rate over the life of the loan.
For example, if you take out a $300,000 mortgage and pay two discount points, you would be paying $6,000 upfront (2% x $300,000 = $6,000). In return, you would receive a lower interest rate on your mortgage, which could save you money on your monthly payments and overall interest paid over the life of the loan.
To determine the break-even point when buying discount points, you need to calculate the difference between the total cost of the points and the total amount of interest that you will save over the life of the loan.
Here's an example of how to calculate the break-even point:
- Let's say you are considering buying two discount points on a $300,000 mortgage with a 30-year term.
- The cost of two discount points is $6,000 (2% x $300,000 = $6,000).
- You expect to save $50 per month in mortgage payments by paying the points.
- To calculate the break-even point, divide the total cost of the points by the monthly interest savings: $6,000 / $50 = 120 months.
This means that it will take you 120 months (or 10 years) to break even on the cost of the points, after which you will start to see savings on your mortgage payments.
It's important to keep in mind that this is just an example and the actual break-even point will depend on your specific mortgage and financial situation. To get a more accurate idea of the break-even point for your situation, it may be helpful to use a mortgage calculator or speak with a licensed professional such as Orange County Mortgage Broker, Nathan Kowarsky at Clear Mortgage Capital.