Discount points are paid upfront to lower the mortgage. Borrowers often confuse between origination fee and discount points. Although the calculation of origination fee and discount points are the same, both are two different cost of borrowing. The origination fee is paid for the privilege of acquiring a mortgage. Ask your mortgage consultant if you need to pay origination fee too.

How to calculate discount points?

Discount points usually range from 1 to 3 points where each point equals one percent. For example, the borrower pays $1,500 upfront ((1% / 100) * $150,000) on a 1% discount points of $150,000 mortgage.

How much is the monthly mortgage payment with or without discount points?

On a $150,000 principal, 6.5% interest rate, 1 discount points, and 30 year mortgage, the monthly mortgage payment without discount points amounts to $948.10. Using 1 discount points, the borrower pays only $851.68 monthly mortgage payment which saves the borrower $96.42.

When you do get back the discount points?

Recoup time is how long to get all the money back with discount points upfront. The borrower gets $1,500 back in 16 months ($96.42 x 16). The borrower benefits from discount points if he does not leave and refinance before the recoup time on his home. Let's say the borrower locks the mortgage on a five year mortgage term. The borrower pays $851.68 for five years which put $5,785.20 ([$948.10 x 60 months] - [$851.68 x 60 months]) back on his pocket.

General Rule

Discount Points are options. It is up to the borrower to decide whether to buy discount points. With planning and shopping, the borrower indeed can save money. Not to mention, the IRS allows the discount points as a tax deductible.