What are discount points in finance?
discount points are fees paid by creditors at a time when a mortgage loan is made to reduce the interest on the loan. One point usually reduces interest by 0.125%. Paying points are not always a good strategy, but it can be, and it's something people should consider during the loan application and loan processing process. Sometimes the seller agrees to pay discount points under the terms of sale, usually in exchange for a higher selling price. For example, someone who takes a loan in the United States of $ 200,000 (USD) would have to pay $ 2,000 per discount point. If the interest on the loan was 6.25% and the debtor wanted to increase it to 6%, it would be necessary to pay two points, ie $ 4,000 to reduce interest. Not all creditors offer discount points for their lending, and creditors usually limit the total amount of points that the debtor should pay.
The apparent advantage in paying discount points is that it reduces the amount paid for the lifetime of the loan. At some point during the loan, the debtor reaches a break of balanceThe quarry point where the amount of money saved from the reduced interest equals the amount paid for the discount points. After this point, the debtor will actively save money. If the debtor has money in the bank at the time of the loan and wants to maintain low monthly payments, paying discount points may be excellent strategy.
However, if the debtor does not keep the house for a long time, paying discounts may not make sense. For example, a break of an uniform point in a loan can be 10 years. If the debtor knows that the house is likely to be sold after five or six years, there is no reason to pay discount points because the debtor will lose; More will be paid at discount points than its time when the house is sold.
When discount points are offered, it helps to sit with a mortgage calculator. The debtors can look at the amount that would be paid throughout the life of the standard interest rate and the reduced interest rate and determine how much money it will be saved. Debtors may also want to calculate an uniform point ifThey plan to sell a house instead of staying or using it as a rental. Another thing to consider is whether the creditor penalizes for early repayment. If the debtor plans to repay the loan early, it does not have to pay points because early payments can generate comparable savings.