Discount Points
Discount points are paid up front to obtain a lower interest rate on your mortgage. The more points you pay, the lower the rate you obtain. Typically, one point equals one percent of the loan amount, and will lower the interest rate by .25 percent.
| Pro | Con |
| Paying points may be advantageous if you intend to hold the property for a long time. | If you intend to hold the mortgage for a short period of time, the cost you pay up front may exceed the benefit you’ll receive from a lower rate. |
To get an idea of whether or not it is worth it to pay points, divide the amount paid in points by the amount saved by having lower monthly payments.
For example: If you are borrowing $100,000, you can pay no points at 7% interest for 30 years, which is roughly $665 per month. Or you can pay 2 points for a 6.5% interest rate, which is roughly $632 per month. Your savings per month would be $33 ($665-$632).
The amount you pay for two points would be about $2,000 (one point is one percent of 100,000 or $1,000).
Following the formula:
$2,000 (amount paid for points) / $33 (savings per month) = 60.6 months.
Under this scenario, you would need to keep the home 60.6 months in order for paying points to be worth the cost. If you don’t plan on keeping the home at least that long, then paying points is probably not a good option for you.
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