What are discount points when getting a home loan?

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What Are Discount Points When Getting a Loan?

• Nathan Carlisle

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What are they?
Discount points are purchased by a home-buyer who
pays the cost of the discount points at closing,
as an upfront fee. In a nutshell, purchased
discount points are designed to lower a
borrowers interest rate on his or her mortgage
loan. A borrower can expect the cost of one
discount point to equal 1 of the entire amount
of the home loan. One discount point may not
sound like much but it can reduce the loans
interest rate by one-eighth to one-fourth. Would
it surprise you to know that discount points have
tax benefits? Depending on which deductions one
can claim, discount points can be entirely tax
deductible but that tax advantage is limited to
only the year of purchase.
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How do they work?

• Here is an example of how the lowering of a
  home-loans interest rate can be realized. We
  will assume the following
• Loan amount 200,000
• Interest rate 5
• Interest rate reduced by one-fourth or 0.25
• Cost of each discount point 1 of entire loan
  amount 2,000 per point
• Borrower purchases 2 discount points and pays
  4,000
• Reduced interest rate is, now, 4.50 instead of
  5.0
• If we continue to make additional assumptions, we
  can take the same 200,000 loan amount and
  purchase 0.5 discount points, with a cost of
  1,000. If wepurchase 0.25 discount points, our
  cost would be 500. With that being said, the
  reduction in the interest rate via discount
  points can vary depending onthe discretion of a
  particular lender.

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How are they a benefit?
From the above information, we can begin to
clearly see how a homeowner can take advantage of
a lower interest rate via discount points and,
thereby, pay lower monthly loan payments. Over
the life of the loan, that savings can amount to
many thousands of dollars. Lenders, too, reap the
benefits of discount points since they receive
the cash payment from the borrower during
closing.
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Are they right for you?
Discount points are designed to save homeowners a
good chunk of money over the long haul. Discount
points are worth considering if you have plansto
stay in your home for at least four years or if
you do not plan on refinancing before that time
period. There are a variety of calculators
availablethat can help determine the appropriate
number of discount points to purchase based on
the length of time you plan on owning your
home. Speaking with a financial professional to
gain insight on how discount points could benefit
your particular scenario is a good first step. At
DunhillHomes, we partner with highly-seasoned
lenders who work-hand-in-glove with us to provide
our homebuyers with the best loan terms and
interest rates,possible.
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• Thank you

For more information check out our blog post
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nt-points-when-getting-a-loan/