Discount points are fees paid to a lender to purchase a lower interest rate. Also known as a rate buy down. As a result, the monthly loan payment is lower for the life of the loan.
One point is 1% of the loan amount. So the cost — paid at closing — for one point on a loan of $100,000 is $1,000. Typically, one point will lower the interest rate .25% to .375%, depending on the type of loan.
Does it make sense for you to consider purchasing discount points? That really depends on the type of loan you are going to get. Typically you should not buy discount points if you are planning on being in the home less than four years,  applying for an adjustable rate mortgage or have plans to refinance within a few years. Discount points are generally a good idea if the home buyer plans to remain in the home over five years and is not planning on refinancing in the near future.
When considering discount points, it’s best to conduct a break-even analysis. This is done by calculating the monthly mortgage payment with no points, then subtracting the monthly mortgage payment with points. The difference is the monthly savings. Then divide the cost of the discount points by the savings. The result is the number of months until the home buyer breaks even.
Discount points for residential property are tax deductible in the year they are paid. Discount points are available when refinancing, but those are deductible over the life of the loan. It’s best to consult with a tax advisor regarding the details of these deductions.
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