Texas Lone Star Lending Video
How Discount Points Really Work
Discount points can lower your mortgage rate, but the cost is not always simple or fixed. In this Plus-5 video, we explain how discount points work, why rate buy-down costs change, and why finding the right “sweet spot” matters.
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Read the transcript
When people hear the term "discount points," it can sound like you're buying something in fixed one-point blocks. But that's not really how it works.
Technically, one discount point equals one percent of the loan amount. So on a $300,000 loan, one point would be $3,000. But you don't have to buy the rate down in full-point increments. Any cost you pay to lower the interest rate is generally shown as discount points, even if it's less than one full point.
The rate itself usually moves in eighths - for example, from 5.75% to 5.625%. But the cost to move down each step is not fixed. It's market driven. One step may be relatively inexpensive, while the next step may cost quite a bit more.
That's why the question usually isn't just, “Can I buy the rate down?” The better question is, “How far does it make sense to buy it down?”
For one buyer, the sweet spot might be one small step lower. For another buyer, it might make sense to buy the rate down much farther. It depends on the numbers, the market, your cash available, and how long you expect to keep the loan.
And remember - it's always okay to ask. We're here to help you get home.