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