You've done your financial due diligence and now you're ready to buy your dream home. Next on your list – getting a mortgage. While shopping for the right mortgage, you'll probably be offered the option to buy "discount points." Those points affect your mortgage interest rate and ultimately your monthly mortgage payment.
In our homebuying glossary we learned that a mortgage rate is the interest rate you pay to borrow the money to buy your new home. Mortgage interest rates play a big role in how much house you can afford and how much you pay for your monthly mortgage payment. Shopping around for the best mortgage rates can also save you a lot of money.
While shopping around, lenders will offer you the option to buy one or more discount points. Discount points are points you can pay to your lender to buy down your mortgage interest rate. Each discount point equals 1% of your loan. Buying points allows you to lock in a lower interest rate on your mortgage. A lower interest rate typically means you pay a lower mortgage payment.
Let's break this down a bit further. On a $200,000 30-year fixed-rate mortgage at 4.25%, 1 discount point would cost you $2,000 and reduce your interest rate about .25%, depending on the lender. That translates into a $29 savings on your monthly mortgage payment. This does not include insurance or taxes.
Check out our infographic below for more tips and info to help you decide.