# Discount Points

Borrowers pay discount points at the closing of a mortgage to receive a lower interest rate, and subsequently lower monthly mortgage payments. Discount points are not mandatory to obtain a mortgage, but you can pay them to reduce your rate.

Calculation

Paying one discount point, on a 6% mortgage, the borrower's rate decreases by 1% to 5%. Typically, a borrower can pay discount points in 1/4 percentage point increments up to 2 percentage points of the loan principal.Discount points equal a percentage of the loan principal. For example, a \$100,000 mortgage, 1 point would be:

• 1% of \$100,000 = \$1000

Is it beneficial?

Borrowers paying discount points experience interest savings over the life of the loan. Use the following method to discover the total interest savings. First, use a mortgage calculator to determine the monthly mortgage payment at different interest rates. For example, a mortgage of \$100,000 principal, over 30-years (360 monthly payments) at 6%:

• The borrower pays \$250. at closing to drop his rate from 6% to 5.75%. As a result, the principal and interest payment are reduced from \$600 a month to \$584 a month. The savings would be \$16.
• Take the \$250 and divide it by the savings, \$16. This will give you 15.6, which is the number of months it will take to recoup initial \$250 discount point payment (16 monthly payments).
• 360 minus 16 payments = 344 remaining payments, then multiply to \$16, gives you a savings of \$5043 savings over the loan.