Paying discount points is essentially prepaying interest. It lowers the monthly payment but increases the upfront cost. Whether paying points makes financial sense depends on how long the borrower plans to keep the loan—the longer the borrower stays, the more they save from the lower rate. The breakeven point is when the total savings from the reduced payment equals the upfront cost of the points. Points are generally tax-deductible in the year they are paid for a purchase.
A borrower takes a $300,000 loan. Paying 2 discount points costs $6,000 (2% x $300,000) upfront and reduces the rate from 7% to 6.5%. This saves approximately $100/month. The breakeven point is 60 months ($6,000 / $100/month). If the borrower stays beyond 5 years, the points are worthwhile.
One point = 1% of loan amount (NOT purchase price). Points reduce the interest rate. Know the difference between discount points (reduce rate) and origination points (lender's fee for processing). The exam may ask you to calculate the cost of points or determine the breakeven period.
Related Terms
Related Concepts
In the context of foreclosure, a deed transfers ownership of the foreclosed property to the new owner, typically the buyer at a foreclosure sale.
A trustee sale is a type of foreclosure where a trustee, appointed under a deed of trust, sells the property at auction to satisfy the debt.
Foreclosure is the legal process by which a lender takes possession of a property when a borrower fails to make mortgage payments. It allows the lender to sell the property to recover the outstanding debt.
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
Frequently Asked Questions
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