Should I pay discount points?
Ryan Ward, Mortgage Banker, what discount points are and when it makes sense to pay discount points on your home loan.
Discount points are pre-paid interest that you can pay upfront to your lender at closing in exchange for a lower interest rate. You will often hear of homeowners "buying down" the rate, which means they opted to pay discount points upfront to lower there interest rate and monthly payment. 1 discount point is the same a 1% of the amount of the loan.
Does it make sense for you to pay discount points? Well, the answer will depend on how long you plan to stay in the home. Find out how much lower your montly payments will be if you pay discount points. Then, calucate how those monthly savings will take to recover the cost of the discount points. If it will take you five years to break even, but you plan to be in the house for 15 years, then buying discount points will probably a smart decision.