Paying discount points at closing can get you a lower mortgage rate; however, you need to run the numbers to make sure paying points is beneficial in your situation. Discount points are different from the origination points you’ll be required to pay; you want to avoid overpaying for origination fees. Here are the basics of points to help you decide if paying discount points is right for you.Discount Points vs. Origination PointsPoints come in two flavors. There are the discount points you pay in exchange for a lower mortgage rate or better terms, and the origination points you pay to the mortgage company or broker that sells you the loan. In both cases one point equals one percent of your loan amount. When you elect to pay discount points you typically lower your interest rate by .25% for each point you pay. Origination points paid to your mortgage company or broker should never be more than 1.5% of your loan amount. Anything more than a point and a half for loan origination is considered excessive.Pros & Cons of Paying Discount PointsPaying discount points for your home mortgage refinance loan can save you money if you plan on keeping the home for a long time. You can calculate your potential savings from paying discount points and how long it will take you to recoup the expense with a simple online mortgage calculator.The main disadvantage of paying discount points is that you’ll have to come up with the cash prior to closing and if you don’t stay in your home long enough you may not recoup the expense. To calculate if paying discount points is beneficial for you, divide the amount you pay by how much lower your mortgage payment will be. This will tell you how long it will take to recoup paying discount points on your home mortgage refinance loan.Suppose that your home mortgage refinance loan is for $150,000 and you qualify for 6.5% with zero points or you can pay two points and qualify for 6.0%. The monthly payment without points will be $947; paying two points will lower your payment to $917 per month for a savings of $30 per month. You will pay $3,000 to save $30 each month and it will take you just over eight years to recoup this expense.You can learn more strategies for refinancing your mortgage without overpaying by registering for a free home mortgage refinance loan tutorial.
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