What are Discount Points?
Discount points are fees paid to the lender at closing in exchange for a lower interest rate on your mortgage. Each point equals 1% of the loan amount.
Formula
[\text{Discount Point Value} = 0.01 \times \text{Loan Amount}]
[\text{Total Cost} = \text{Discount Point Value} \times \text{Number of Points}]
Calculation Example
For a loan of $480,000 with 2 discount points:
Step 1: Calculate one point's value:
[\text{One Point} = 0.01 \times 480{,}000 = 4{,}800]
Step 2: Calculate total cost:
[\text{Total} = 4{,}800 \times 2 = 9{,}600]
The total cost of 2 discount points is $9,600.
Benefits of Discount Points
- Lower monthly mortgage payments
- Reduced total interest over the loan term
- Tax deductible in the year paid (consult a tax advisor)
When to Buy Points
Consider buying points if:
- You plan to stay in the home for many years
- You want to reduce monthly payments
- You have extra cash available at closing