Simple Definition : Discount Points
When mortgage rate are quoted by a bank, they're typically quoted with two parts -- the mortgage rate, and the number of discount points required to get that rate. The higher the number of discount points, the lower your rate will be.
Discount points are different from "origination points", which are fees a bank charges to "do your loan". By contrast, discount points are fees specifically used to buy-down your rate.
On a settlement statement, discount points are sometimes labeled "Discount Fee" or "Mortgage Rate Buydown" and one discount point carries a cost equal to one percent of your loan size.
A few examples of how to calculate discount points follow, assuming a loan size of $200,000 :
1 discount point would cost $2,000
0.5 discount points would cost $1,000
0.25 discount points would cost $500
Discount points can be tax-deductible, depending on which deductions you can claim on your federal income taxes. Discount points paid in conjunction with a home purchase can be 100% deductible in the year in which they're paid. Be sure to check with your accountant.
How Discount Points Affect Your Mortgage Rate
When discount points are paid, the bank collects a one-time fee at closing in exchange a lower mortgage rate to be honored for the life of the loan. The banks consider this payment to be "prepaid mortgage interest" and, because mortgage interest can be tax-deductible, discount points sometimes come with tax breaks.
Exactly how far your rate will drop with discount points, though, will vary by bank.
As a rule of thumb, paying one discount point will lower your mortgage rate by 0.25 percentage points. Paying two discount points, however, will not always lower your rate by 0.50 percentage points, nor will paying three discount points always lower your rate by 0.75 percentage points.
As an example of how discount points may work on a $100,000 mortgage :
4.50% with 0 discount points. Monthly payment of $507.
4.25% with 1 discount point. Monthly payment of $492. Fee of $1,000.
4.00% with 2 discount points. Monthly payment of $477. Fee of $2,000.
Note that paying points come with a cost, but that it also makes for monthly savings. In the above example, the mortgage applicant will save $15 per month for every $1,000 spent at closing. This creates a "breakeven point" of 67 months.
If you plan to stay in your home longer than 67 months, or don't think you'll want to refinance within 67 months, paying points may be a good idea.
Also, be aware that paying discount points will lower your loan's APR. Your APR is not your mortgage rate. Your mortgage rate is your mortgage rate. Shopping for the lowest APR is not always a good plan.
"Negative" Discount Point Loans (Zero-Closing Cost)
A helpful aspect of discount points is that lenders will offer them "in reverse". Instead of paying points for access to lower mortgage rates, you can get points from your lender to pay for closing costs or other items due at closing.
The technical term for reverse points is "rebate". Mortgage applicants can typically receive up to 5 points. However, the higher your rebate, the higher your mortgage rate.
Here is an example of how rebate points may work on a $100,000 mortgage :
4.50% with 0 discount points. Monthly payment of $507.
4.75% with 1 discount point. Monthly payment of $522. Credit of $1,000.
5.00% with 2 discount points. Monthly payment of $537. Credit of $2,000.
Homeowners can use rebates to pay for some, or all, of their loan closing costs. There are multiple reasons to go this route.
The first is that zero-closing cost mortgages reduce the amount of cash required at a closing. Buyers using low-or no-downpayment mortgages may find this option appealing -- especially if their savings are depleted or less-than-optimal
Reverse points can be good for a refinance, too. Using rebates, a loan's complete closing costs can be "waived", allowing the homeowner to refinance without increasing his loan size. When mortgage rates are falling, this is an excellent way to lower your rate without constantly paying fees.
Should You Pay Discount Points Or Get Them?
The decision to pay discount points or receive them is a personal one, and one which will depend on your individual loan and your circumstances. If you're planning to move within the few years, paying points could be a losing gamble; you may never reach your breakeven.
Conversely, if you're unsure of how long you'll have your home or your home loan, getting reverse points from your bank can make good sense.
Take a look at today's mortgage rates with and without discount points. Compare and see which loan suits you best. Comparisons are available online with no obligation whatsoever.
To say mortgage rates are volatile right now is an understatement. Every few days for the past two months, there have been heavy swings in mortgage pricing, translating to strong gyration in mortgage rates. Nothing can be more frustrating for a pre-approved potential homebuyer than knowing their ability to qualify and their subsequent proposed payment could change in an instant. But there are other options that can help take the volatility out of your house hunting.
Should You Lock In a Mortgage Rate?: Most lenders will not lock in your interest rate until you have a ratified purchase contract or a bona fide legitimate purchase agreement. Mortgage lenders offer interest rate locks for 30 days, 45 days, 60 days and some even as long as 90 days, with the majority of buyers doing 30-day rate locks to match the traditional 30 days for close of escrow. Locking in an interest rate means you've committed to an interest rate that will be used for the term of the loan, e.g. 360 months for a 30-year fixed-rate mortgage.
• Payment clarity upfront.
• More time to budget and plan your finances during the escrow process.
• More time for the lender to get your loan package through the underwriting process.
• More allowance to focus on other aspects of your purchase offer, i.e. contractual obligations.
• Missed opportunity for a reduction in the interest rate, which means a lower monthly payment.
Should You Float?: Floating your rate is defined as simply not locking in your interest rate. Floating essentially allows your interest rate and payment to move on a daily basis until you fully commit to your lender on an interest rate.
• The opportunity for a lower interest rates and costs.
• Depending on your individual lender's policies/procedures, the opportunity to switch loan programs during the loan process, such as going from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage.
• This can be a risky position to be in during a volatile interest rate environment.
• You risk rates rising while you float, which could reduce your ability to qualify for a mortgage and could impact your earnest money deposit on your purchase transaction.
Which Is Right for You?: It depends on your personal threshold for how much risk you're willing to take on by floating for interest rate opportunity. If you can qualify for the mortgage loan even if rates were to rise during your loan process, you would have the luxury of being able to take advantage of a favorable market reaction the next time the bond market rallies. On the flipside, you'd be entering into a purchase contract with thousands of dollars on the line in exchange for what may or may not come to fruition with rates. This is why it solely depends on your appetite for risk and how much you're willing to gamble in the market. If you have a 30-day close of escrow, that's not much time for floating in an attempt to seize something better.
Other Timing Considerations: Don't forget interest rates aren't the only consideration to take during the home-buying process. Some other factors include:
• Ordering an appraisal, or making sure value comes in at purchase price.
• Releasing any inspection contingencies.
• Providing updated financial documentation in a timely manner to the lender. (This is a big one!)
• Releasing any loan contingencies.
While these steps in the purchase process seem relatively small, they can very quickly become task-heavy, which otherwise can change your focus from interest rates to making sure everything else is in order. Granted, your loan officer and real estate agent will be handling a lot of these steps in conjunction with you, but these are things to be mindful of in addition to trying to time the market.
Strategy for Locking In a Mortgage Rate: In a perfect situation, locking ahead of major economic news is generally the most conservative approach. It is expected that before large economic market mover information comes out, an idea of how the market will react is typically released beforehand. For example, whenever the Federal Reserve makes a statement about the financial markets, usually there is information and analysis leading up to the speech before the news actually hits the markets. This gives you and your lender an opportunity to examine the market and discuss whether not it makes sense to float or lock the interest rate prior to the official announcement. Keep in mind that the speculation beforehand is just that -- speculation -- and you will need to make your own call based on the information.
Purchasing a home is one of the most important decisions for most people, yet not many take the time to learn all the rules of the process. Before getting a mortgage in Fresno, you should do your research and make sure you understand every aspect of it. Here are the five important mortgage facts to get you started.
1. The Fees Matter
You should keep in mind that the quoted mortgage rate is never the final sum you should budget for. On top of the interest rate, you will be charged various fees, such as origination and closing costs, as well as mortgage points. Only after all these are taken into consideration, you can get an idea of the actual amount you will be paying. When comparing lenders, it is best to look at the annual percentage rate, as it usually takes into account all of these costs.
2. The Rates Change Often
Similarly to stocks, bonds, and other investment types, mortgage rates fluctuate frequently depending on the state of the market. The rate can change within hours, which is why if you find something that works for you, it is better to lock that rate immediately.
3. Rates Vary Depending on Lenders
While the government regulates a lot of aspects of the mortgages, lenders are still free to offer different rates to buyers. Their fees vary greatly as well, including the credit check fee, appraisal, and title insurance. For this reason, it is always better to shop around and compare multiple lenders before making your final choice. Keep in mind that finding the lowest possible rate can mean a lot of savings over the years.
4. Refinancing Is Worth Looking Into
Even if you lost money on your home during the financial crisis, you can still refinance your mortgage and get a better rate on it. You can do so by taking advantage of one of several government based refinance programs that were created specifically for lenders like you.
5. Low Down Payments Are Available
While putting a 20% down payment on your home is a good idea, giving you equity in your house right away, not many people can afford it these days. Various federal programs are available though, using which buyers can put a down payment as low as 3.5% and still get their mortgage in Fresno approved.