If you want a lower interest rate, you can pay fees to a lender to buy a lower interest rate with the fees known as discount points and the process called a rate buydown. The result will be a lower mortgage payment each month for the life of the loan.
One point is equal to 1% of the amount of the loan, which will be paid at closing. This means if your loan is $150,000, the fee would be $1,500. In the majority of cases, one point will lower the interest rate somewhere between .25% to .375%, according to the type of loan you are getting.
If you are wondering if it is a good idea for your customers to purchase discount points, a few factors need to be considered. If your customer is only planning to be in the home for under four years, will refinance in a few years, or is applying for an adjustable rate mortgage it is best to stay away from discount points.
Discount points are normally a great idea if the family buying the home wants to live in the home for at least five years and does not have any plans to refinance for several years into the future.
When discussing discount points with the home buyer it is a good idea to show them a break even analysis. The way you do this is by calculating the mortgage payment they will pay each month without any points; next take away the mortgage payment they will pay monthly. The difference is the money they will save. Now, divide the cost of the discount points by the money they will save and the answer is the number of months it will take for them to break even.
Another great factor of discount points is that as long as they were used to purchase residential property they can be deducted from the taxes in the year the home buyer pays the fees. Discount points are also available during refinancing and are deductible over the life of the loan. Of course, the home buyer should speak to their tax advisor to learn more about the deductibles associated with discount points.