United States
Hong KongDiscount points and buydowns
One discount point is one percent of the loan amount and reduces the interest rate. Break-even is the point cost divided by the monthly saving. Origination points are a fee for making the loan and buy nothing.
Simple arithmetic and one important distinction.
What a point is
One percent of the loan amount. On a 300,000 dollar loan, one point is 3,000 dollars.
A discount point is paid to reduce the interest rate. How much reduction a point buys varies with the market and is not fixed.
Discount against origination
A discount point buys a lower rate. An origination point is a fee for making the loan and buys nothing.
Both are quoted as points and both are one percent of the loan amount. Only one changes the rate, and questions rely on candidates conflating them.
The qualified mortgage cap of 3 percent on loans of 100,000 dollars or more counts points and fees together. A loan loaded with both can breach it.
The break-even calculation
Divide the cost of the points by the monthly saving they produce. The answer is the number of months before the borrower is ahead.
Pay 3,000 dollars to save 60 dollars a month and the break-even is 50 months. A borrower planning to move in three years should not pay those points.
Temporary buydowns
Different again. A temporary buydown reduces the rate for the first year or two and then it rises to the note rate, funded by an upfront deposit often paid by a seller or builder.
A 2-1 buydown reduces the rate by two points in year one and one point in year two.
Who pays
Points may be paid by the borrower, the seller or the lender depending on the transaction, and seller-paid points are subject to contribution limits by program.
Common questions
What is a discount point?
One percent of the loan amount, paid to reduce the interest rate.
What is the difference between discount and origination points?
Discount points buy a lower rate. Origination points are a fee for making the loan and buy nothing.
How do you calculate the break-even on points?
Divide the cost of the points by the monthly saving. The result is the number of months to break even.
What is a 2-1 buydown?
A temporary buydown reducing the rate by two percentage points in year one and one in year two, before it reaches the note rate.
Do points count towards the qualified mortgage cap?
Yes. Points and fees together are capped at 3 percent on loans of 100,000 dollars or more.