When is it good to pay discount points?

As rates slowly rise with inflation, buyers will be looking for more options to purchase the home they want. While there are other products, one of the simplest and safest options is paying points. Discount points are fees paid to the lender at closing to permanently pay down the interest rate of the loan (this is not a buy down).

Each "point" is equal to 1% of the loan amount. For example a $200,000 loan, a point would equal $2,000. The amount of interest rate discount depends on the loan product, but it can reduce the rate from a quarter point to sometimes over a half point. This is especially beneficial on larger home purchases and buyers that can't document their income.

If buyer has a little extra to put into the purchase or the seller is willing to contribute a little bit more, this becomes a stronger option.

Example:

Suppose a buyer wants to purchase a $200,000 house


0 points in discount | 1% in discount

Interest Rate 6.25% | 5.875%

Payment $1231.43 | $1183.08


A simple formula for weighing the benefits:

Monthly savings is $48.35 divided into the discount of $2000.00
It would take just over 41 months or 3.44 year to recover the cost.

If your buyer plans on staying in the house for more than 3.5 year this makes sense. Remember, the longer that you plan on staying in that house, the more important that rate becomes.

For my other active rain posts: http://activerain.com/blogs/ethanhoke

IMPORTANT LEGISLATIVE ITEM NEEDS YOUR ATTENTION!

Have you or one of your friend ever got stuck with a higher mortgage rate, because they had to use the builder's Mortgage Company?

There is legislation in the Texas House of Representatives that would prohibit sellers (builders) from making incentives contingent upon using any specific service provider. Builders would no longer be able to steer borrowers to their own mortgage companies.

HB 3798 is legislation to allow the home buyer to apply any contributions from the builder as inducements to buy the home, not be contingent on specified lenders or mortgage originators. This will give the buyers a fairer position and also the originating industry a chance to be competitive for the buyer.

Contact you house rep to pass this;

http://www.legis.state.tx.us/Members/Members.aspx?Chamber=H

I'm curious what you think about this. Let's do our own vote. You can comment and say yes or no.

You can always say more. I'll total the votes - 1 for 1 against