Has shopping for a mortgage left you wondering what a homebuyer has to do to get a lower interest rate in this market? You can cross your fingers and hope that rates fall, or you can take action and buy your way to a lower interest rate with mortgage discount points.
What are discount points?
Discount points, often referred to as “mortgage points,” are a one-time fee a borrower can pay to a lender to buy a reduced interest rate on a mortgage. Using discount points to buy down your rate means you will pay less in interest over the life of your loan. Some people look at discount points as prepaying their interest because, essentially, you would be paying more money up front to pay less over time.
How much does a discount point cost?
One (1) discount point costs 1% of the loan amount. Each discount point may lower the interest rate as much as 0.25%, depending on product and loan characteristics. So, in a scenario where a discount point reduced the rate by 0.25%, if you wanted to reduce your interest rate by 0.5% on a $400,000 mortgage, you would need to purchase two discount points which would cost $8,000. To calculate what discount points would cost for your specific needs, try our free discount point calculator.
Are discount points the only way buy down my interest rate?
There’s more than one way to buy down the interest rate on your mortgage. Two popular options are buying mortgage points and utilizing a temporary buydown. While these options help borrowers achieve the same goal, they are quite different.
Discount Points
Discount points as described above are an optional way to buy a lower interest rate for the entire life of your loan. That means you can lock in a lower rate for the duration of your mortgage term. This could be an option to consider if you plan to live in the home long enough to pass the break-even point or have no plans to refinance any time soon.
Temporary Buydown
A temporary buydown is a lump sum paid for by the builder or seller to temporarily reduce the interest rate for the first few years on a mortgage. This option can help you ease into mortgage payments or if you plan to move within a few years, or expect your income to grow. You can use our free buydown calculator to see what you could save with a temporary buydown.
Since market rates change daily, it’s always a good idea to talk to a mortgage expert to make a plan for your home purchase. A seasoned home loan professional can help you understand what will work best for your budget and help you navigate the options to lower your interest rate. Contact us today to start your journey to homeownership.
