This BLOG On Understanding Discount Points During Mortgage Process Was PUBLISHED On November 10th, 2019
Understanding Discount Points in today’s mortgage Market
- Many of our readers are not aware of discount points and how they are used in today’s ever-changing mortgage climate
- Discount points have become part of the mortgage process in this rising-rate environment
- Understanding discount points will make sense after looking at a few examples
- In this blog, we will detail how discount points affect your mortgage
What Are Discount Points And Understanding Discount Points
What is a discount point?
- A discount point can be defined as an upfront fee paid directly to the lender in exchange for a reduced interest rate
- Sometimes these are referred to as mortgage points, points, one discount point is equal to 1% of the loan amount
- So, for $200,000 loan, 1 discount point would be $2,000. The common misconception that one point pays down the rate of 1%
- That is 100%, not the case
- It’s closer to1 Point lowering your interest rate by .25% on average
Interest rates and investors have been all over the map with the economy gaining momentum, so this can change drastically depending on your situation.
Understanding Discount Points And How It Affects Borrowers With Lower Credit Scores
How points affect lower credit scores:
Most borrowers believe discount points are extra fees by lenders to buy mortgage interest rates down.
- That is true for the most part
- In today’s mortgage climate, many lower credit score borrowers must utilize discount points to obtain a mortgage
- With the uptick in the United States economy we have seen interest rates rise
Investors are leery to raise the actual interest rate too far. Many lenders are starting to charge discount points upfront to obtain interest rates for borrowers with lower credit scores.
Discount Points Can Be Paid With Sellers Concessions
Seller concessions to help the discount points:
- Many of our clients have lower credit score profiles
- This is not a problem
- If you are required to utilize discount points to obtain a rate based on credit score, it is a good idea to ask for seller credits when submitting your offer
- Your realtor should know how to do this, or we can discuss the credits you will need to buy the home
- Let’s face it, not everybody has extra money laying around
- Many of our clients use FHA loans to buy their homes and FHA loans allow up to 6% of the purchase price for seller concessions
- Within this 6%, you can cover most of your closing costs and any discount points associated with the loan
This is becoming more and more common in today’s housing market.
Understanding Discount Points On VA Loans
Understanding Discount Points On VA Loans:
Gustan Cho Associates, we also specialize in VA mortgages.
- Many of our VA clients have credit scores below 580
- In this case, the veteran usually needs to utilize discount points to enter into the mortgage
- The good news for our Military clients is, the VA put a maximum discount point cap of 2 points (or 2%of the loan amount)
- And if the investor is quoting rates with more than two points needed, the Veteran cannot pay the overage
- This is something the lender must cover
Gustan Cho Associates at Loan Cabin have the utmost respect for our service members and will usually eat that cost for our troops!
Buying Down Mortgage Rates With Discount Points
Make sure buying EXTRA points is going to save you money:
It is important to weigh out all of your options regarding discount points. If you have the extra funds to utilize them, you need to make sure they will actually save you money. Using the chart above, paying the rate down from 5.25% to 5.125% costs a difference of $189, and saves you $20 a month. This will start to be a good investment in just 10 months. Paying the rate down from 5.125% to 4.875% costs a difference of $763 and saves you $39 a month. This will save you money in just 20 months!
Understanding Discount Points On Break-Even
Typically, if the discount points do not start to pay for themselves within five years, it’s not a good idea.
- The average American is in their home loan for just five and a half years
- Around 5 and a half years is when Americans either sell their house or complete a refinance
- We do not want to leave any money on the table
Please reach out to the expert Mike Gracz on 630-659-7644 for more information on discounts points and when to use them.
Tax Benefits On Discount Points
When utilizing discount points it is important to remember this cost is tax-deductible for primary residences.
- There are a few basic rules that apply before you can write off this cost
- It must be on your primary residence
- The points charged must be common in your area
- The points must be in an amount common in your area
- The discount points are listed on the settlement statement at closing
- Gustan Cho Associates are MORTGAGE EXPERTS, not accounting experts
- We recommend Consulting a CPA for any tax-related questions
For more information on discount points and tax deductions, see the IRS WEBSITE on this topic.
Qualifying For Mortgage With Direct Lender With No Overlays
We pride ourselves on offering top-notch customer service. We will spend the time to educate you on all aspects of your loan, including discount points. We want to make sure where you are getting the best deal available to you. Gustan Cho Associates at Loan Cabin Inc. are 5-star national direct lenders with no overlays on government and conventional loans. Please reach out to us for a competitive rate quote or any general questions you may have. We may be contacted seven days a week, mornings or evenings. Your questions can be sent to firstname.lastname@example.org or you can call in directly to 630-659-7644.