Discount Points, Are They Worth It
With Colorado home values and interest rates increasing, home buyers are looking for ways to save money any way they can. An attractive option for many homebuyers is buying discount points, also called “buying down the loan.” When doing this, the buyer will pay an upfront fee in order to lower their interest rate over the length of the loan.
Is the additional cash upfront worth having a lower interest rate? Let’s take a closer look at what discount points are and if they’re a good idea for you.
What Are Discount Points?
Discount points are a type of prepaid interest that homebuyers can choose to purchase that lowers the interest rate on their mortgage. Each point costs 1 percent of the loan amount and lowers the loan’s interest rate by one-eighth to one-quarter of a percent. For example, if you bought a $500,000 home in Colorado, one point would cost $5,000.
The lower interest rates mean a lower monthly payment and can equal tens of thousands of dollars in savings over the life of the loan, which is why many homebuyers choose to go this route. However, the additional payment upfront may not be for everyone.
When Are Discount Points Worth It?
Discount points are best for people who aren’t able to qualify for the best interest rates due to credit issues but do have additional cash they can contribute at closing. The lower monthly payment may also be needed if the borrower is struggling to qualify due to problems with their debt-to-income ratio.
In some cases, the buyer can ask the seller to cover their discount points, but don’t get your hopes up in today’s hot seller’s market, where buyer negotiations don’t happen very often.
Who Should Pass On Discount Points?
Before buying discount points, you need to take a look at how long it will take to break even. Typically, it takes between five and ten years to recoup the extra money you pay toward discount points. That means if you are planning to only own the home for a few years, the extra expense won’t be worth it. Instead, you could consider using the extra cash toward your down payment. This way, you’ll have more equity in the home when it comes time to sell.
Interested In More Information?
If you’d like more information on discount points and would like help deciding if they are right for you, give Home Loans a call or check out more information here. We can go over the monthly savings you’ll receive and help calculate if that savings will be worth the out-of-pocket expense.