What are discount points?

Many people are unclear about what discount points are. I wanted to take some time to explain discount points and how they may or may not be beneficial to you.

Generally if you plan to live in a home for several of years discount points may not be a bad idea. Discount points give a borrower the option to buy down the interest rate on their loan. One discount point is one percent of the loan. If you buy a home for $100,000 a discount point will cost $1000. Typically one discount point will lower the the interest rate by .125 percent. So a loan at a 6.5 percent rate will be 6.375 percent after a discount rate is purchased.

As a consumer you must determine if that difference in interest rate will pay for the $1000 you spent. Here is how you do it.

$100,000 Loan - 30 Year Term

• 7.5% Interest, no points = $699.21 monthly payment

• Buying 1 point for $1,000 = monthly payment $690.68

• Monthly Savings = $8.53

• $1000 / $8.53, = 117 months

Your break even point is 117 months. You would have to live in the home nearly ten years to recover the cost you paid for the interest.

The best option would be to have the sellers pay for your discount points. Have your agent include that into the contract if that is the best option for you.

To access more information about Cabot AR real estate, click the link. You can also visit the link to use the mortgage calculator to help you figure the break even point if you paid for discount points.