What are discount points?

Discount points also referred to as mortgage points, are upfront payments made to the lender during the mortgage process. Specifically, discount points allow borrowers to reduce their interest rate, resulting in decreased monthly mortgage payments throughout the loan term. Typically, each point costs 1% of the total loan amount.

How do discount points work?

Discount points work by allowing borrowers to lower their interest rate through an upfront payment made to the lender during the mortgage process. When borrowers choose to pay discount points, they make a payment at closing, typically 1% of the total loan amount per point. In return, the lender reduces the interest rate on the loan. Furthermore, discount points are beneficial because buying down points can be the difference between qualifying and not qualifying.

How do you calculate discount points?

The calculation of discount points depends on factors such as the loan amount and loan type. The cost of buying down an interest percentage point can range from 1/8th of a discount point to 3 discount points.

Are you eligible for discount points?

To qualify for discount points, consider the following factors.

  • Loan Program: Check the policies of different lenders and loan programs to determine if they offer discount points as an option.
  • Financial Capacity: Ensure that you have the financial means to cover the upfront cost of the points. Points can vary from 1/8th discount point to 3 discount points
  • Long-Term Mortgage Plan: Discount points are most beneficial for borrowers who plan to keep their mortgage for a significant period. This allows them to recoup the upfront cost through interest savings over time.
  • Breakeven Point: The breakeven point is an important consideration when determining whether you should buy down your interest rate. Your breakeven point is the amount of time it will take to recoup the cost of the discount points required to lower your interest rate.

By considering these factors, you can determine if purchasing discount points is a suitable option for you and potentially save on your mortgage in the long run.

What are lender credits?

Lender credits are a financial arrangement where the lender covers some of the upfront costs associated with obtaining a loan, reducing the amount the borrower needs to pay. These credits can be used for various expenses such as fees and closing costs. They are designed to make homeownership more affordable by lessening the financial burden on the borrower. Lender credits can help borrowers manage their cash flow during the loan process and reduce their immediate out-of-pocket expenses.

How do lender credits work?

Lender credits work by providing borrowers with funds to offset the closing costs associated with obtaining a mortgage. When a borrower receives lender credits, it helps reduce or eliminate the upfront expenses they would normally have to pay out of pocket during the mortgage process.

These costs can include items such as origination fees, appraisal fees, title fees, and prepaid expenses like property taxes and insurance. In exchange for providing these credits, the lender may slightly increase the interest rate on the loan. This allows the lender to recoup the funds provided as credits over the life of the loan through higher interest payments.

Who qualifies for lender credits?

Here are the key factors that determine if you qualify for lender credits. Keep in mind this can vary among lenders and loan programs.

  • Creditworthiness: Your creditworthiness, including your credit score and credit history, can impact your eligibility for lender credits. Lenders may consider borrowers with higher credit scores as more qualified for receiving credits.
  • Loan-to-Value Ratio: The loan-to-value (LTV) ratio, which represents the loan amount compared to the appraised value of the property, can affect eligibility. Lower LTV ratios may increase your chances of qualifying for lender credits.
  • Loan Amount: The amount of the loan you’re applying for can also play a role. Some lenders may have specific requirements or thresholds for providing credits based on loan amounts.
  • Loan Type and Purpose: Certain loan types or purposes, such as a purchase loan or a refinance loan, may have different eligibility criteria for lender credits. Review the guidelines for your specific loan type and purpose.

It’s important to note that lender credits are not guaranteed and may vary depending on the lender and loan program. To determine your eligibility for lender credits, consult with a loan officer who can provide personalized guidance based on your financial situation and the specific loan options available to you.

Discount Points vs. Lender Credits: Which is Better?

When it comes to choosing between discount points and lender credits, it’s important to consider your financial situation and long-term goals. Discount points involve paying an extra fee upfront, which can lower your interest rate and result in lower monthly payments. If you plan on keeping the loan for a long time, then the money saved on interest can outweigh the upfront fee. This option is beneficial for those who want to own their home for an extended period and save money in the process. However, it’s crucial to have enough funds to cover the upfront fee.

On the other hand, lender credits offer immediate savings by reducing or eliminating some of the costs associated with obtaining a mortgage. However, they often come with a slightly higher interest rate, leading to higher overall payments throughout the loan term. Lender credits can be advantageous if you don’t have limited funds available upfront, or if you intend to sell or refinance the home in the near future. Nevertheless, it’s essential to consider the long-term costs since the higher interest rate can result in paying more over the life of the loan.

To make an informed decision, weigh the upfront costs, potential long-term savings, your current financial capacity, and your plans for the home. By considering these factors, and consulting with an expert Direct Mortgage Loans loan officer, you can determine whether discount points or lender credits are the better choice for your specific circumstances.

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Eligibility and approval is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral and underwriting requirements. Direct Mortgage Loans, LLC NMLS ID# is 832799 (www.nmlsconsumeraccess.org). Direct Mortgage Loans, LLC office is located at 11011 McCormick Rd Suite 400 Hunt Valley, MD 21031. Equal housing lender.