What is a discount point?
A discount point is an upfront payment to your lender that lowers your interest rate. It’s sometimes called “buying down the rate.” The lower rate lasts for the life of the loan, so you pay less interest each month.
Points are called bona fide when each one buys a real, measurable rate reduction. That’s the kind CapCenter offers. You choose how many to buy, if any, and your quote shows the rate for each option.
What points cost
One point equals 1% of your loan amount, not the home price. On a $320,000 loan, one point is $3,200. You can buy partial points, such as 0.250 or 0.500, and you pay for them at closing.
How much a point lowers your rate
The rate drop per point changes with the market, so check current pricing. Each extra point usually buys a little less rate reduction than the one before, so the time it takes to earn back your cost grows as you buy more. Your quote shows the exact rate and payment for each point option.
When points pay off
Points pay off if you keep the loan past your break-even month. To find it, divide what the points cost by what you save each month.
Points tend to make sense if you expect to stay in the home and keep the loan for many years. If you might sell or refinance in the next few years, a no-points rate usually costs less overall.
Points vs. closing costs
Closing costs pay for the work of making your loan, such as origination, appraisal, title and settlement. With CapCenter’s ZERO Closing Costs (restrictions apply), CapCenter waives or pays for those. Points are different. They’re an optional trade of cash today for a lower rate, and you choose whether to buy any.
That also makes lenders easier to compare. Line up quotes at the same number of points, and the difference you see is the closing costs other lenders charge.
Points at a glance
- Cost: 1 point = 1% of your loan amount.
- Break-even: points cost ÷ monthly savings = months to earn back the cost.
- Points are optional and are not closing costs.
- Points paid on a loan to buy your main home may be tax deductible. Ask a tax advisor.
Sources
- Consumer Financial Protection Bureau, What are discount points and lender credits?
- IRS, Topic 504, Home mortgage points
