When you’re getting a mortgage, you'll get pitched by the lender the ability to pre-pay or pay down or pay off points, in advance of getting your mortgage written. These clever ways of packaging the way you pay rent on your money are cleverly called points, or mortgage points. Discount points are a way you can prepay some interest up front to your lender in exchange for a reduced interest rate on the life of the mortgage. In the same way that paying a higher down payment can save you money in the long-run, so too can paying discount points. (They're almost always tax-deductible as well, so it's a trade-off of cash flows to figure out the right answer. If you have the cash handy, it's often a good idea to pay them and reduce your interest rate.)
One discount point is one percent of the mortgage amount (you can think about this as $1k for every $100k, if that makes it easier). The more discount points you can pay, the less interest you’ll owe on the loan...which could be 15, 30, or more years. Yeah, ouch.
Fun fact: discount points doesn’t always need to be paid out of pocket. Confusingly enough, discount points can be rolled into the loan balance you’ll owe, but typically only in a refinance or special mortgage (like FHA) situation.
Related or Semi-related Video
Finance: What is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello