What are discount points?
Discount points enable you to lower your loan’s interest rate. They are basically prepaid interest, with each point equaling 1% of the total loan amount. By and large, when you pay a point on a 30 year mortgage, you can lower your interest rate by 1/8 (or.125) of a percentage point. When comparing loan rates, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are a good idea if you plan to stay in your home for some time since they will lower your monthly loan payment. Points are tax deductible when purchasing a home and sometimes you can negotiate with the seller to pay for some of them.Many borrowers are required to pay discount points in order to qualify for their mortgage, because paying points reduces the monthly payment, which thereby reduces the Debt To Income ratio you've heard so much about. This is a measure of your monthly housing expenses, including the mortgages payment and other recurring monthly expenses divided by your monthly income. If your mortgage payment is too high, you may not be able to qualify for the loan because your Debt to Income ratio will be too high for the bank to feel confident in your ability to repay the mortgage. Paying tax deductible discount points can sometimes lower the payment enough to allow you to qualify for the mortgage. It is important to remember that, even though you may have paid discount points, when rates go down do not hesitate to refinance. |
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