This is part of an ongoing blog series that discusses commonly used mortgage strategies among home buyers and homeowners in Washington. Today, we will look at how borrowers in Washington State might be able to lower their mortgage rates by paying discount points at closing.
Paying Discount Points for a Lower Rate
For some borrowers, the number-one goal when shopping for a mortgage loan is to get the lowest rate possible. There are several different factors that can affect the rate you receive on a home loan. They include the type of loan you are using, your credit history, and other factors.
“Discount points” can also influence the mortgage rate you receive when taking out a home loan in Washington. These are points paid to the lender in exchange for a lower rate. They are added into your overall closing costs, which means you would pay them on the day that you close the loan.
In a typical lending scenario, paying discount points is optional. Some home buyers and homeowners in Washington choose to pay points in order to get a lower mortgage rate, while others do not. So why do it? The idea here is to pay a certain amount of money up front in order to reduce the mortgage rate, which could save the borrower money over time.
It comes down to your financial goals and priorities:
- Borrowers who want to secure the lowest possible mortgage rate might use discount points to shave some basis points off the assigned rate. Depending on how long the homeowner keeps the loan, this could save a substantial amount of money over time.
- On the other hand, borrowers who wants to minimize their upfront closing costs might choose to avoid points and take the slightly higher interest rate. This is often the case with borrowers who have limited funds in the bank to cover the down payment and closing costs on a home purchase in Washington.
The break-even point is another important concept here. This is when your accumulated savings from securing a lower rate begin to exceed the amount paid in prepaid interest.
As a borrower, you want to choose the mortgage financing strategy that works best for your particular situation. And that’s one of the many areas where we can help you. Our knowledgeable loan officers can present you with different financing options (e.g., with and without discount points), so you can see how it would play out over time.
Other mortgage strategies in this series: