A discount point is defined as interest paid upfront in exchange for a lower rate. Discount points make sense if you plan to stay in your home for a while.

Discount Point - To Pay or Not to Pay

A point in the mortgage business is equal to 1 percent of the loan amount. 1 point would be 1%. You don’t have to pay a full point when paying discount points. You can pay less than a point or more than a point.

In our example, let’s say 1 discount point could lower your rate from 6.25% to 6.00% (this is just an example it would depend on the actual rates for that day). You would pay 1 point or 1 percent of the loan amount at closing. It would cost \$3,000 on a \$300,000 loan amount (1% X \$300,000).

Mortgage loan discount points are smart if you plan on being in the house for a long time. The way to figure out if a discount point makes sense is to do a little math. The principal and interest payment for the rate of 6.25% would be \$1,847. The principal and interest payment for the rate of 6.0% would be \$1,798.

That is a difference of \$49. It costs you \$3,000 for the 6.0% rate so divide \$3,000 by \$49. You get 61. It will take you 61 months to recoup your \$3,000 and start benefiting from the lower rate. If you plan on being in the home longer than 61 months, a discount point makes sense.

Discount Points Tax Deductible?

Remember since a discount point is defined as interest, it is tax deductible.

Paying discount points can save you interest over the life of the loan. And even if you don’t stay in the home the full 30 years, every year after your break even point is savings.

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