Discount Points or Rate Buydown

What Are They?

When you get a mortgage you can pay a one time fee to get a lower interest rate. This fee is included in your closing costs. These fees go by many names but are most commonly referred to as discount points, buydown points, or a rate buydown. Don’t be confused, these are not a discount in fees, but in fact higher fees in exchange for a lower interest rate.

When to Pay for a Lower Rate

Upfront cost should be compared to monthly savings. There is a simple break-even analysis that your mortgage professional can help you with. If you are in the mortgage for a certain amount of payments you will save on overall payments in the long run. Often times even getting 1/8th of a percent lower interest rate will take over 2 years to break even on the discount point cost. Paying for a lower rate can make sense if you will be in the loan for a while. Consider when you are likely to refinance or sell the home. If you don’t hold the mortgage for very long, you may never recoup the upfront fee you pay for a lower rate and payments.

Watch Out!

Online lenders often quote a rate with 1% of the loan amount paid in discount points. This means higher closing costs. Make sure you compare rates with the same amount of points paid in closing costs to get that interest rate.