Discount Points

Posted at 9:35 PM, Apr. 27, 2007

Discount points are fees paid at closing to lower monthly mortgage payments, and can help buyers save money in terms of overall costs over the life of the loan. In essence, points are prepaid interest. A point is 1% of the loan. So on a $100,000 loan, one point equals $1,000. This cost is paid to buy a lower interest rate, and is known as a rate buydown.

If homeowners intend to keep their property short term -- five years or less -- they might not recover the cost of paying the discount points. If they intend to keep the mortgage for a long time, discount points are an excellent upfront investment.

To determine whether discount points are to their advantage, clients must first calculate their monthly payments both with and without the points. Determine the difference of the monthly mortgage payment. Now take the difference (i.e., the savings) on the monthly payment and divide it into the cost of the discount points. The end result is the number of months it will take to recover the upfront cost to lower the interest rate.

Another key benefit is that discount points for residential real estate are tax deductible in the year they are paid. Tax deductibility can vary for points in purchase and refinance transactions. In refinancing, the deduction for points must be spread out over the life of the home loan. Consult your tax advisor regarding the details of these deductions.

Clients should consult their tax advisors regarding the details of these deductions.

Kirk.Alexander@americanhm.com, American Home Mortgage