Discount Points Are a Better Deal Than They Were 5 Years Ago

During the COVID era, we spoke often about 0-points interest rates. We sent emails, wrote blog articles, and posted on social media about how unnecessary discount points were and alerted buyers to beware of the competitors who pushed them. Today, however, the purchase of discount points is a regular topic of conversation between borrowers and their knowledgeable, responsible mortgage banker. Because, oftentimes, discount points are a great solution for today’s buyers. 

So, what changed from the days of 2020-2022 to now?

How can you tell if discount points are a good deal? 

Over the life of a loan (typically 30 years), points can save a borrower tens of thousands of dollars. The thing is, not every buyer plans on staying in the same home for 30 years. And even fewer go 30 years without refinancing. That said, one of the biggest considerations is how quickly the points you purchased will start saving you money. If you think you will sell or refinance before breaking even on the cost of points, then they are not a good deal. 

What are discount points? 

First, if you’re unfamiliar with discount points, they are an upfront cost to lower your interest rate. A point typically costs 1% of the loan amount and lowers your rate by 0.25%. 

Example: If you put 5% down on a $350,000 home, and you wanted to lower your interest rate from 6.5% to 6%, the points would cost $6,650. 

• 0.5% interest rate discount = 2 points = 2% of the loan amount
• $350,000 – ($350,000 x 0.05) = $332,500 
• $332,500 x 0.02 = $6,650 

Do you save instantly?  

The majority of the time, we consider saving money on a monthly basis. When you buy points, your monthly payment is instantly lower than it would be if you hadn’t bought them. This makes it seem like you start saving right away. However, at the beginning of your mortgage term, what you’re “saving” is actually what you’ve already spent to buy the points. When you look at it from a long-term perspective, no, points do not save you money instantly. 

Why are points a better deal than they used to be? 

The bottom line is that points were often unnecessary during the COVID era because it took much longer to break even on the cost of them than it does now. For first-time buyers looking at condos, townhomes, and starter homes, especially, it was very possible that they would’ve shelled out more money upfront than they expected, only to barely save money, if at all, by the time they sold. But that has changed. Take a look.

Let’s use the same example from before: a first-time buyer putting 5% down on a small $350,000 home. This buyer is planning on purchasing two discount points, at a cost of 2% of the loan amount, thereby lowering their rate by 0.50%. 

• Now, we’ll transport ourselves back to a week in 2021 when the market interest rate is 3.5%. The first thing their mortgage banker asks is how long they plan on staying in their starter home. If it’s less than 10 years, this mortgage banker would strongly advise against points because the buyer wouldn’t recoup the cost of points until the middle of the 8th year in the home. 
• Fast forward to today, when the interest rate is 6.5%. The buyer and their mortgage banker will discuss the cost of points, because if the buyer can comfortably afford them, they’ll be saving money by the fall of the 4th year. In this case, points have a higher likelihood of being worth it.  

Talk to a mortgage banker about points

Most people know the area they want to live in for at least 3-5 years before purchasing a property. If this sounds like you, then it’s a good idea to talk to your mortgage banker about points. Depending on your purchase price and market interest rates, the break-even point could be even sooner! Get professional advice before you decide whether points are a good deal for you. The advice is absolutely free!