Discount Points - What Are They?

By
Real Estate Agent with GreatWest Realty DRE# 00827565

One of the most common questions home buyers have while obtaining a mortgage for a newly purchased home is, "What are points?"

The answer - Each point or discount point, as real estate professionals and mortgage lenders often refer to them, are equal to 1% of the loan amount.  For example, on a $100,000 loan, one discount point equals $1,000.  And ½ discount point for the same loan would be $500.

Points are paid to a lender at closing in order to lower the mortgage interest rate.  Although "discount points" are a part of your closing costs, they are not considered loan fees.  Discount points are an optional way to buy the interest rate up or down.

Buyers sometimes wonder how much buying a point will lower the interest rate?  Typically, each point paid on a 30-year loan will lower the interest rate by 0.125%.  That means a 7.5 percent rate would be lowered to 7.375 percent.

Depending on how much lower of an interest rate you wish to obtain, the more discount points you will be required to pay.

Usually if a buyer is going to retain ownership of their home for a period less than 3 - 4 years, the benefit from paying points, to buy down the interest rate, doesn't compute in savings.  However, for a long-term homebuyer, the savings from paying points at the origination of the loan, can become significant over the course of years of ownership in the home.

If you are a homebuyer, feel free to query your Real Estate Professional with your questions about real estate loans and mortgages.

close

Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
Topic:
ActiveRain Community
Groups:
Sacramento Real Estate
Rancho Cordova Real Estate
Everything California
Around The Water Cooler
All things California
Tags:
sacramento real estate news
sacramento home buying
sacramento home selling
discount points

Spam prevention
Show All Comments
Rainmaker
619,693
Gloria Todor and Doug Durren - Delaware County PA Real Estate
Century 21 Absolute Realty - Media, PA
Hard Working Professionals (484) 431-3686

Myrl, Very helpful information. 

Gloria

Aug 12, 2010 10:14 PM #1
Rainmaker
1,119,228
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

Myrl ~  This question comes up so often.  This is a great explanation and with your permission, I would like to share this post with some of my clients.

Aug 12, 2010 10:21 PM #2
Ambassador
1,463,468
Jennifer Fivelsdal
JFIVE Home Realty LLC | 845-758-6842|162 Deer Run Rd Red Hook NY 12571 - Rhinebeck, NY
Mid Hudson Valley real estate connection

Myrl I love your explanation of discount points it is easy to grasp.   Right now the rates are really low; if only more people had jobs and could get mortgages it would be an ideal time to buy. 

Aug 12, 2010 10:23 PM #3
Rainmaker
1,226,856
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

Doug and Gloria - Thanks for your comment!

Joan - Sure, feel free to share it with anyone you think it will help!

Jennifer - I wish more folks were in a position to buy now and take advantage of the current prices with low interest rates.

Aug 12, 2010 10:38 PM #4
Rainmaker
736,453
Barbara S. Duncan
RE/MAX Advantage - Searcy, AR
CRS, GRI, e-PRO, Searcy AR

I like your explanation because it is simple and to the point.  I "suggested" you.

Aug 12, 2010 10:39 PM #5
Ambassador
1,332,931
William Johnson
RE/MAX Associates - San Diego, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Hi Myrl, Barbara said it best and she already hit the suggest button so what's left to say and do? I do recall a lender telling me that generally there can be a limit  on the amount of buy down. As I recall it was something like max of 6 points?? I 'm not positive about this, it was sometime ago and so much has changed anyway.  Now I'm not sure why I  brought it up. Guess just to chat. LMAO

Aug 12, 2010 11:12 PM #6
Rainmaker
1,226,856
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

Barbara - Thank you for your kind comment.  Points are one of those things that lay people often grapple with to understand.

William - I can't remember how long you have been in this business, but do you remember 1981, when interest rates were 18 1/2%?  Discount points in the 1980s use to fluctuate greatly, along with the interest rates.  A lock was only as good as the lender, because if it was beneficial for them to delay the loan approval beyond the lock, they would. . .Such a different world today!

Aug 12, 2010 11:44 PM #7
Show All Comments
Rainmaker
1,226,856

Myrl Jeffcoat

Greater Sacramento Real Estate Agent
Ask me a question
*
*
*
Spam prevention