Discount Points

Discount points can be one of the most confusing aspects of loan.  Buying points can be a good way to lower your monthly payments because you pay your lender upfront rather than paying for interest each month as you repay your loan.  But deciding whether to buy points or pay a higher interest rate also depends on how long you are planning to keep your loan.  If you are thinking about buying points on a mortgage, for example, it might be helpful to conduct a break-even analysis.  To do this, you will take your monthly payment without the savings from buying points, minus what the monthly payment would be if you do buy the points.  You will then divide the cost of buying points by the amount you would save each month.  The result is how many months it would take for you to recover the cost of buying the points.  If that time period is longer than you want to stay in your home or if you are thinking about refinancing your mortgage, you might want to reconsider buying points.

If you do want to buy points on your mortgage and you plan to stay in your home for a while, also consider the tax benefits.  Generally, buying points on a loan is tax deductible.  Rules do change if you are refinancing your mortgage, so if you have any questions, be sure to ask an accountant and your lender.

Also remember that if you have an adjustable rate mortgage, or ARM, buying points might not be right for you.  An ARM is a mortgage in which the interest rate is adjusted periodically based on an index, so buying points only to have the interest rate change before you break even could cost you more money than it is worth.