Discount points are optional, upfront fees a buyer can pay in exchange for getting a lower mortgage rate from its lender.
One discount point costs 1 percent of the amount borrowed. Paying one discount point on a $100,000 mortgage would costs $1,000.
As a general rule, one discount point lowers your mortgage rate by one-quarter percentage point, or $12 per $100,000 borrowed.
Getting a smaller monthly payment can be good for your household budget. When you spend less on housing, you have more to spend more on living and saving.
There are three times when it makes sense to pay points.
- When you good savings, but low monthly income
- When you're certain you won’t sell or refinance within 5 years
- When the seller's paying your mortgage closing costs
Paying discount points isn't for everyone, though. The economic benefit isn't always there, and points are a sunk cost. They can't get recouped in a refinance or when a home sells.
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