# Buying Down a Mortgage Rate: When to Pay Discount Points

Discount points are one of the more confusing aspects of the mortgage process for many borrowers. They're fees that are specifically used to buy down your interest rate. They're sometimes called a "discount fee" or "mortgage rate buydown" on settlement statements.

One discount point carries a cost equal to one percent of your loan size. Discount points are not the same as your “origination fee”, the fee that the mortgage lender charges to complete the loan.

## A Look at Numbers

When a loan officer talks about one point on a \$100,000 loan, he's referring to one percent of the loan which would equal \$1,000. One point equals \$3,000 to be paid on a \$300,000 loan. It's payable at the time you close.

## You Have 3 Choices

Lenders offer different interest rates on loans with different points. You have three main choices to make about points. You can decide you don’t want to pay them or receive any points at all. This is called a zero point loan. Or you can pay points at closing to receive a lower interest rate.

Your third option is to have points paid to you and use them to cover some of your closing costs. These are called "lender credits".

## A Hypothetical Situation

This example shows the tradeoff between points as part of your closing costs and interest rates. We'll say you're borrowing \$180,000 and you qualify for a 30-year fixed rate mortgage loan at an interest rate of 5 percent with zero points. The rates currently available might be different from what is shown in this example scenario. You'll have these options to consider:

## The Break-Even Analysis

The time you plan on owning the home is a big part of the equation if a “break-even” analysis is important to you. The analysis is simple. Take the cost of the discount points and divide that by the monthly payment savings or cost you'll realize and you’ll figure out how many months it will take you to break-even.

• \$675 in cost / \$14 per month savings will result in a break-even point of 48.21 months.

If you plan on keeping your mortgage for more than 4.1 years, or 48.21 months, then paying the discount points makes sense. Anything less than that and you might have made the wrong financial decision.

Keep in mind that there are certain tax benefits in holding and paying a mortgage and there are tax consequences as well that you should consider when you run the numbers. Both interest rate and discount points are tax deductible for some borrowers. It depends on the nature of your occupancy, the number of properties you own, the size of your loan, and a few other factors.

## The Bottom Line

It's best to consider all the details when you're making a decision on whether to pay discount points. Applying your personal financial situation to your mortgage choices can result in a decision that affects you for 30 years, so make it wisely.