A home buyer can acquire a lower interest rate by paying discount points at closing. Discount points or prepaid interest points are a one-time fee that is paid upfront, creating a lower interest rate over the term of the mortgage. When your interest rate is lower, your monthly payment becomes lower and more affordable. Let’s take a closer look at how you can get a lower interest rate.

How Does Paying Down Discount Points Work?

When a buyer purchases points it will reduce the interest rate across the life of the loan. While this costs more upfront, it can save the buyer money over time and ensure that their interest rate, nor monthly principal and interest payment, will ever increase (assuming it is a fixed rate mortgage).

How Much Does It Cost to Get a Lower Interest Rate?

The principal balance of your mortgage will determine the cost of each discount point that you purchase. Each point is equal to 1% of the total loan amount. If you were borrowing $300,000 and if your lender offered you the opportunity to buy one point and reduce your interest rate from 4.25% to 4%, it would cost you $3,000.

Your interest rate is a critical component of your mortgage and directly impacts your home buying process. Your loan officer will help you structure your mortgage, down payment, interest rate points, and more to put you in the best position to purchase your home.