Discount/Credit

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Pay points? Receive points?

Pay points, or receive points, that is the question...

You can pay points (called a discount fee) to reduce the note rate on your mortgage; or
You can receive points (called a rate credit) if cash is tight, and you are prepared to accept a slightly higher rate.

Pay points
This is in essence prepayment of interest. A (somewhat accurate) rule of thumb is that a 1% "discount fee" or "buydown", results in a 0.25% reduction of the note rate on a 30-year fixed rate loan. (Your payback period is about 5 years). And over the life of the loan you will save about 5% of the original loan amount. So: 5 year payback - save 5% total.

Receive points
This is the opposite of paying points. You receive a rate credit (in cash, on closing), and your rate is slightly higher. The same rule of thumb applies: a 1% rate credit will result in a 0.25% higher rate. A rate credit can be used for any closing expense, or qualified prepaid expense, but not for the down payment..

Example
Below is an example of a $100,000 loan - showing discount and rate credit options. You can multiply it out for your personal circumstances. (This is an illustration only. Adjustment factors change every day!)