One of the most misunderstood aspects of getting a home loan is that of discount points. There can be some confusion when the fee is referred to by many different names. “Points”, “Discount Points”, “Discount” and “Investor Fee” are just a few of the names referring to the same thing. For the most part that confusion has been eliminated by reliable lenders, but whatever the name, the definition is the same.
The primary purpose of discount points is to increase the yield to the investor of the loan. By collecting “points” the investor is able to provide below market interest rates to the borrower. One point equals one percent of the loan amount. By charging a borrower discount points, a lender effectively increases the yield on the loan above the amount of the stated interest rate. When locking in an interest rate on a home loan Buyers can pay a lender points as a method to reduce the interest rate on the loan, thus obtaining a lower monthly payment in exchange for this up-front payment.
Simply put, lower rate = higher points (cost).
- Points enable the lender to offer lower interest rate FHA, VA, and conventional loans to their borrowers.
- That lower rate may offer an unqualified Buyer an opportunity to get an interest rate that then allows them to qualify for a home mortgage. Or, simply help provide a more comfortable monthly payment.
- Points fluctuate because the “cost” of borrowing money goes up and down, depending on supply and demand.
You must calculate the return on paying points. It can lower your monthly payment but you must also determine how long you will be keeping the loan. There is a “break-even” point that you must surpass in order to justify the upfront cash cost of buying down your interest rate. Be sure to calculate this or have the conversation with your trusted lender or real estate agent.