In the world of home mortgages, a discount point is equal to one percent of the total loan amount. Some people pay points to reduce the interest rate of their loans. According to some estimates, for every point you pay, you reduce your interest rate by 1/4 to 1/8 of a percent.
One of the most important things to consider when buying a home is how long you plan on staying in the home before you sell it. If you’re staying in the home for less than five years, it may not be worth it to pay discount points. It generally takes at least five years to recover the money you pay for one point. Some people prefer to take the money they would have spent on paying discount points and use it for other short-term investments.
One of the main reasons for paying points up front is to write them off on your income taxes. If you’re refinancing your home, you need to deduct the points over the life of the loan. If you’re not sure if you can deduct points on your income taxes, it’s important to check with your accountant or financial advisor.
There are a number of different ways to calculate the advantages of paying points up front. Many lenders offer online calculators. You simply enter some basic data such as the loan amount, length of the loan, and the interest rates with points and without points. The result is a comparative analysis of the cost of the points, monthly payments, monthly savings, and your break-even point.