What is a Discount Mortgage?
A discount mortgage, also known as a discount point mortgage, is a type of home loan where the borrower pays an upfront fee to reduce the interest rate on the loan. Each discount point typically costs 1% of the loan amount and can lower the interest rate by a fraction of a percentage point.
How Discount Points Work
When you take out a mortgage, you have the option to purchase discount points from the lender. This purchase is made at closing and effectively acts as prepaid interest. The cost of discount points varies, but the goal is to reduce your monthly payments and the total interest paid over the loan’s term.
Benefits of Discounting Your Mortgage
- Reduced monthly payments.
- Lower total interest paid over the loan’s life.
- Potential for significant savings for long-term homeowners.
When is a Discount Mortgage a Good Idea?
This strategy is most beneficial if you plan to stay in your home for a long period, allowing ample time to recoup the upfront cost of the points through lower monthly payments. It’s crucial to calculate the break-even point to determine if the savings outweigh the initial expense.
Challenges and Misconceptions
One common misconception is that discount points are always a good deal. If you sell your home or refinance before recouping the cost, you may end up paying more. It’s essential to compare loan offers carefully.
Frequently Asked Questions
Q: How many discount points can I buy?
A: Lenders usually limit the number of points you can purchase.
Q: Are discount points tax-deductible?
A: In many cases, yes, but consult a tax professional.