There are so many different terms that home buyers need to understand when they consider getting a mortgage. For the first time home-buyer, these terms and definitions can be overwhelming to say the least, but the more you know ahead of time, the better prepared you will be. Of all of the different mortgage terms and definitions out there, the one that seems to get the most attention from the general public has to be “mortgage discounts.” After all, who doesn’t love to get a good discount, especially on something as expensive as a mortgage?
The term “mortgage discount” may be slightly misleading as getting this type of discount is offered in terms of “discount points.” Here’s how they work.
Mortgage discount points are a one-time upfront mortgage closing cost that gives the borrower the opportunity to enjoy “discounted” mortgage rates. This discount is designed to be less than the current market rate. According to the IRS, this mortgage discount is a type of prepaid interest on your mortgage, meaning your “points” are tax deductible.
How Much is a Discount Point Worth?
Generally speaking, discount fees are typically quoted as point. A point equals 1 percent of the amount of your mortgage. This all depends on the current mortgage market, the lender and the property you are looking to buy or the mortgage you are looking to refinance.
This will be clearly outlined when you meet with your mortgage lender about your available rates. When you get approved for your mortgage, your lender will quote you two different rates. The first part of your quote is the actual mortgage rate, the second part is the number of “discount points” required to get that rate.
In short, you are paying a percentage of the loan amount to get a lower interest rate, so it is a discount, but it still comes at a price.
Many times, taking this option, will in short, help you save money overall on your mortgage. However, every situation is different. You need to look at your current situation and your personal finances in order to determine if paying down your interest rate actually makes sense. In most cases, if you are planning on sticking with this mortgage and your home for the long-term it will make sense. If you are planning on moving or refinancing in the future—it may not.
The best way to make a smart decision for you and your family is to talk to a mortgage or loan professional about your options so you can determine the best course of action moving forward. As with any loan option, make certain that you are asking questions and getting as much information as possible so you can make the right decision and a decision that makes the most financial success given your situation.