In the mortgage world, one “point” equals one percent of the borrower’s loan amount. For example, one point assessed on a $100,000 mortgage would cost $1000. One discount point will typically reduce the interest rate of a 30-year fixed rate mortgage by about one-quarter percent. For example, a borrower paying zero points at 6.25% should expect to pay about 6.00% after paying one discount point. The general rule is slightly different for shorter-term loans.

By far, the most important thing for borrowers to remember about buying discount points is that it will only benefit them in the long term. Borrowers will normally not realize the financial benefit of discount points until their loans are about five years old. To this point, consider that one discount point on a $150,000 mortgage costs $1,500 and will save the borrower about $25 per month at today’s rates. Not accounting for inflation, it will take that borrower 60 months, or five years, to make back the cost of his discount point.

Where’s the strategy of using discount points? Obviously, if you are quite certain that the loan you are getting into is going to be your last for well beyond five years, you will probably benefit from one or more discount points.

Retiring seniors purchasing homes stand to gain the most from discounting their mortgage rates, especially if they do not plan to move ever again. Using equity from the sale of their existing homes to buy down the interest rate on their new purchase will result in a significant increase in their net disposable income—or their “fun money”—every month. This can be very important to those on a fixed-income.

Timothy Phillips is a mortgage banker and newspaper columnist.  Homebuyers should always consult a professional for guidance specific to their situation.

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