Can you explain discount points?

[Josh O'Hearn]

Hello everyone, I received this message from the mortgage company I am using this morning: “One thing that I was told is that the interest rate would be around 7.875% with 1.25 discount points.” The interest rate seems high seeing my credit is over 700. I haven’t learned about discount points yet. Keep in mind, this is a duplex and I’m putting 15% down. It is being used as a true investment property, I am not living in half. The mortgage company is not requiring PMI. If anyone can explain the discount points I’d appreciate it! Thanks.

[Joe Splitrock]

@Josh O'Hearn whenever I do the math on discount points, it isn't a good deal. Basically you are paying more upfront in exchange for a lower long term interest rate. The problem is if you calculate the long term interest savings, it takes many years to even break even on the larger upfront interest payment. Also if you refinance or pay off before you break even, then you basically wasted all that upfront money. Lenders seem to push the points hard, leading me to believe they get paid more if you go that route.

As far as your interest rate, that seems really high. Two weeks ago I locked in 5.25% on a 30 year, 25% down with no points on an investment property. To be fair I am a strong applicant as far as low DTI and credit score over 800, but still your rate seems high. Maybe it is due to low down payment or some other factors. I would talk to a couple more mortgage companies, because regardless of other factors it seems high.