Should You Pay Discount Points?

When you start out shopping for a mortgage, you’ll notice you have more choices than you might have expected. The first might be the loan term, such as a 30-year or 15-year loan. There are also 10, 20, and 25-year terms available but lenders rarely promote them. They have them but it will be rare they ever post them. It’s usually a 30 or 15 year. You’ll need to choose. The longer term will have lower monthly payments than the shorter term. The 30-year will also have more interest over the life of the loan than the 15. This is something your loan officer can help you with. After you make your initial decision, you’ll have another. If you take a 30-year loan, you’ll next need to select your rate. Most lenders offer several different rates for the same program. The difference is whether or not you want to pay for a lower rate. The choice is completely yours; the lender doesn’t care which you choose.  There are different rates and the lower ones come with a small price. This small price is called a discount point. A point is expressed as a percentage of the loan amount. One point means it’s one percent of the amount borrowed. On a $300,000 loan, one point comes to $3,000. For example, with a standard 30-year fixed-rate loan, paying an additional $3,000 in discount points can reduce your rate by about 0.25%.  There will be other rates available with more or fewer points. You might find a rate with just 0.50 points, for example. You might be able to find a rate lower by 0.50% if you pay two points and so on. It’s your loan officer who can quote you not only the rate but if each rate does come with any points, how much those points will be. Again, it’s completely up to you, the lender has no preference. Conversely, you can move the rate up a bit and not pay any points at all. Higher still, the lender will actually issue a lender credit toward your closing costs.  Okay, now the question is- should you pay any discount points at all, and if so, how many? The loan officer will do some math for you but in essence, as long as you own the property loan enough to ‘recover’ the cost of the point(s), it might be a good idea. Typically, a couple of years before you ‘break even’ due to the lower payments might be a good choice. Anything longer than that needs a bit more study. Personally, I’ve never been a fan of paying too many points at all, but the answer can be found after you and your loan officer run a few numbers together.