Demystifying Loan Discount Points in Mortgage Lending
January 09, 2023
At Bison Ventures, we believe in informed mortgage lending. We understand that the process of securing a mortgage can be a bit daunting, especially when it comes to deciphering the language of the trade. One term that often leaves homebuyers feeling perplexed is “loan discount points.” Today, we aim to dispel the fog of confusion surrounding this concept.
Simply put, a loan discount point in the mortgage industry is equivalent to roughly 1% of the amount you borrow. To put that into perspective, let’s use a $500,000 mortgage as an example. In this case, one discount point equals $5,000.
You may be wondering who foots the bill for this additional cost. The answer is: it could be anyone involved in the transaction. The borrower, the seller, the real estate agent, or a combination of all these players can contribute to covering the cost of these points.
So, what’s the purpose of these discount points? They allow us to permanently buy down the interest rate on your loan. For instance, if you’re starting with an interest rate of 7%, paying one discount point could potentially reduce the rate to about 6 3/4 or 6 5/8. The more points you pay, the further you can lower your rate.
The primary benefit of this approach is the significant savings in interest costs over the lifespan of your loan. When you opt to buy down the interest rate, that reduced rate applies for the full term of your mortgage – be it a 15-year or a 30-year loan.
However, before jumping into this decision, it’s crucial to consult with our team at Bison Ventures. We can run the numbers to assess how long it will take to recoup the money spent on buying down the rate. By doing so, we ensure that this strategy aligns with your goals and the duration you intend to stay in the house.
Loan discount points can be a beneficial tool, but understanding them fully is key to making the right decision for your financial future. Remember, we’re here to help you navigate the mortgage lending process, ensuring you’re informed every step of the way. At Bison Ventures, your peace of mind is our top priority.