In getting a mortgage to buy a home, it's important to grab every chance you're given to get a lower debt. Aside from doing extensive research in finding the best loan option, another thing you could take a look at are "mortgage discount points".
What Are Mortgage Discount Points?
Mortgage discount points allow borrowers to lock with a lower interest rate. Discount points are a form of interest that is included in your closing costs. Each point has the same value as 1% of your entire loan amount. Meaning, if your loaning $200k, each point would cost you $2k, if you borrow $150k, each point will be worth $1500.
Discount points may look like an outrageous idea at first glance, especially when it involves additional closing costs. However, it has long term advantages that will save you a lot over the life of your mortgage.
Advantages Of Discount Points
As mentioned, discount points allow people to save money in the long run. Here's a simple illustration of how a borrower can save money on a 30-year loan that is worth $150k:
0 Points = 4.125% interest = $727 Monthly Payments
1.25 Point = 3.875 % interest = $706 Monthly Payments
1.75 Points = 3.75 interest = $695 Monthly Payments
Mortgage discount points may require upfront payment, but your loan savings by the end of your term is much higher than your additional closing cost. Let's say you got yourself a 1.75 mortgage discount points. This means that you will pay $2625 during the loan's closing. But over the term of your loan, you will only pay $250k instead of $261700 if discount points aren't used. That's quite a difference when you look at it like that.
Disadvantage Of Mortgage Discount Points
Technically, mortgage discount points comes with no disadvantage if you plan to stay in the property for the whole span of the mortgage. In the example given above, it will take you 7 years to break even with the amount that you initially paid for. So if you like wandering from one place to another, mortgage discount points may not be for you.
Also, although discount points may look like a deal sent from heaven to most borrowers, it's worth noting that it's not the only additional cost you will face at closing, especially when you don't intend to pay at least 20% down payment. Borrowers who cannot pay at least 20% down will need to pay for a private mortgage insurance, which is usually about 1% of the total borrowed amount. For a $150k loan, the insurance payment will be $125 per month or $1500 a year.
This is one important dilemma for people who are torn between paying for discount points or a higher down payment. Luckily, this is just a matter of mathematics, so if you're one of the people who are on the fence between these two options, enjoy the fact that math always has a definite answer. Also, a mortgage expert would be one handy buddy for you during your mortgage process.
What Else Comes With Discount Points
As a summary, there are various things you can do if you decide to get discount points. For instance, you can invest your monthly savings to earn a significant amount by the end of your loan. Furthermore, discount points also come with tax benefits. So generally, buying discount points has many advantages for borrowers as long as they intend to get the best out of their point purchase. Clearly, it's not for everybody, and it is just for people who will stay in their property long enough to start saving money.
