Well to start out, you need to understand what they are exactly. Discount points are fees paid to a lender in order to purchase a lower interest rate, which is also known as “rate buydown”. The result of having discount points is a lower monthly mortgage payment over the life of the loan. For the discount points 1 point is equivalent to 1% of the loan amount. For example 1 point on a loan of $100,000 is $1,000. Depending on the type of loan you will usually find that 1 point will lower the interest rate .25%to .375%.
When does it make sense for clients to purchase discount points? It is not a good idea if the client plans on living in the home less than 4 fours, is applying for an adjustable rate mortgage or is planning on refinancing in a few years; although if they plan on remaining in the home for over 5 years and do not plan on refiancing in the near future it is generally a good idea.
It is best to conduct a break-even analysis when you are considering discount points. A break-even analysis can be calculated by taking the monthly mortgage payment without any points, then subtract the monthly mortgage payment with points.
Something else you may not know is that discount points are tax deductible in the year they are paid for residential property. You should also know discount points are available when refinancing, but are deductible over the life of the loan. Talking with a tax advisor in regards to the details of these deductions would be wise.
Call me when you need help with your home purchase in Bryan or College Station, Tx!