When your lender quotes you an interest rate that is not the final rate that you need to agree to. Through the use of what is known as mortgage discount points you can lower your mortgage interest rate.
Discount points are a type of prepaid interest. You pay your lender an upfront fee at closing for a lower interest rate. One point amounts to 1% of the loan amount. So 1 point on a $200,000 mortgage would equal $2,000.
The primary purpose of buying discount points is to reduce your interest rate and conversely lower your monthly payment. Typically a point usually amounts to an interest rate reduction of 0.25%. This can also be referred to as buying down the rate on a mortgage.
For example, with a 30-year, $200,000 loan at an interest rate of 4%, you would pay $954.83 in mortgage payments a month, not including taxes and insurance. Paying 1 point at 0.25% per point would lower the interest rate to 3.75% and drop the monthly payment to $926.23. This would entail an upfront cost of $2,000 to buy those points at closing. It would take just under 6 years in this scenario to recoup the cost of the point, after that you would begin to save money on a monthly basis.
The length of time you intend to live in your new home is a big factor in deciding whether or not to buy points. If your plans are to remain in your home only for several years paying for points will probably not make financial sense. However if you believe you will remain in your home an extended period, it can make financial sense to pay points to obtain a lower interest rate.
Another consideration regarding points, since they are a form of interest, is that they are usually 100% tax-deductible during the tax year you purchase your home. If you are in a higher tax bracket you may find this deduction offsets the cost of buying points from the start.
Wallingford PA Real Estate – Wallingford, PA 19086