What is Mortgage Discount Point?
A point is the amount that a borrower pays to the lender at the closing of loan. On a loan of $100,000, 3 points means $3000. Points are part of the cost of credit to borrowers and part of return on investment for lenders. Should you pay points while refinancing your mortgage? It depends on the rate of interest on which you are seeking loan and at the same time the period for which you are taking loan. If you think to stick by the loan at least for 3-4 years, paying points would be advantageous for you.By paying points you will be lowering down your interest rate from 0.25 to 0.75 percent. Hence points are sometimes used to buy down the interest rates. Point actually helps borrowers in longer period. By paying 1 or 2 points on your loan, you can save 100s of dollars every month and 1000s of dollars in the entire loan term.
Do you need to pay points compulsorily?
Paying point is optional. Your lender will offer you choice of paying points or sticking to loans without points. If you think point is actually benefiting, you can go for it. This can simply be calculated by seeing the time period in which your saving equals the amount you paid as points. Always remember the fact that point system actually benefits people who wanted to continue with the same loan for long period. While choosing the best mortgage deal always asks lenders about the point.
Some lenders may advertise about their low interest rate but will not mention about the points. Be careful while dealing to such lenders as lenders may sometime try to get benefit at the cost of your ignorance. Remember one thing always, i.e., point system benefit only when you want to be in same loan for long duration.