When shopping for a home loan, you might hear about discount points or a percentage discount on your mortgage. Understanding how these discounts work can help you decide if paying for them upfront will save you money in the long run.
What Is a Percentage Discount on a Mortgage?
Lenders often offer mortgage discount points, which let you pay a fee at closing in exchange for a lower interest rate. Each point typically costs 1% of your loan amount and reduces your rate by a set percentage (for example, 0.25%).
For example: Loan amount: $300,000 1 point = 1% of $300,000 = $3,000
That $3,000 payment might lower your rate from 6.5% to 6.25%, giving you a lower monthly payment and less interest over time.
How to Calculate the Percentage Discount Savings
To figure out the potential savings, follow these steps:
- Find your original interest rate and monthly payment.
- Use a mortgage calculator or lender estimate to see what your monthly principal and interest payment would be without buying points.
- Find the new interest rate with the discount. Ask your lender how much the rate would drop if you purchased points.
- Calculate the new monthly payment. With the lower rate, see what your new monthly payment would be.
- Compare the difference and the upfront cost.
- Subtract the new payment from the original payment to find your monthly savings.
- Divide the cost of the points by your monthly savings to see how many months it would take to break even.
Example:
- Without points: $300,000 loan at 6.5% = $1,896/month
- With 1 point: $300,000 loan at 6.25% = $1,847/month
- Monthly savings: $49
- Upfront cost: $3,000
- Break-even: $3,000 ÷ $49 ≈ 61 months (just over 5 years)
If you plan to stay in the home longer than the break‑even period, buying points could save you money over time.
When Should You Consider a Mortgage Discount?
A mortgage discount may be worth it if:
✅ You plan to stay in the home long enough to recoup the upfront cost.
✅ You have extra funds available at closing.
✅ You want to lower your monthly payment and total interest.
Talk to an Expert Before Deciding
Every situation is unique, and the right choice depends on your budget and future plans. Have questions about mortgage discount points or how to calculate a percentage discount for your mortgage?
Reach out to Scott and the Smolen Team! We’ll walk you through the numbers and can connect you with a trusted lender who will help you explore your options.
Contact us today to get started on your path to homeownership!
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