With interest rates higher than they have been in some time, many homebuyers are using discount points these days. What are discount points? Here’s a quick rundown!
What are discount points?
In order to lower your interest rate, you pay an upfront fee called “points” or “discount points.”
Current day (as of July 2022), almost everyone is paying discount points. Some lenders are even saying it’s a requirement.
Why would I want to pay for discount points?
Paying for a lower interest rate means you will spend less over the life of your loan – especially if you’re going to live in the house for an extended period of time.
If you only plan on living in the house for 2-3 years, it may not make sense for you to spend your upfront cash this way. Chat with your lender to see if it makes sense for you!
How much are discount points?
Most people think that one discount point (meaning one percent) equals one percent of the loan amount. While this is true, there is more to it! A discount point is not always one whole percentage point. It can also be .125, .25, .5, .625, .75, .875, 1.0 and so on. The cost of the buydown is that percentage of the loan amount.
Important to note: If you pay one discount point, it does not mean your interest rate goes from 6% to 5%.
Lagniappe
Seller credits can not only pay for closing costs but can be used to pay your interest rate down too!
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