In a recent press release from Consumer Financial Protection Bureau (CFPB) issued a new report today finding that more borrowers paid “mortgage discount points” upfront as overall interest rates rose.
Discount points can be worth it for some borrowers, but not for everyone. The value of discount points depends on several factors, including:
1. How long the borrower plans to stay in the home: Mortage discount points are more beneficial for borrowers who plan to stay in their home for a longer period, as it gives them more time to recoup the upfront cost through lower monthly payments.
2. The size of the mortgage: Mortage discount points may be more advantageous for larger mortgage loans, as the interest savings over time will be more significant.
3. The difference in interest rates: The interest rate reduction offered in exchange for discount points varies among lenders. A more substantial rate reduction can make discount points more attractive.
4. The borrower's financial situation: Paying discount points requires additional upfront cash, which may not be feasible or optimal for all borrowers.
To determine if mortgage discount points are worth it, borrowers should calculate the break-even point – the time it takes for the cumulative monthly savings to exceed the upfront cost of the discount points. If the borrower plans to stay in the home beyond this break-even point, then discount points may be a good choice.
However, for borrowers who plan to stay in their home for a shorter period or who lack the extra upfront cash, discount points may not be the best option. Additionally, if borrowers believe they may have the opportunity to refinance at a lower rate in the near future, paying discount points may not be advantageous.
Ultimately, the decision to pay discount points should be based on a borrower's unique financial situation, long-term plans, and a thorough comparison of mortgage offers from multiple lenders.
