These mortgage scenarios will almost always mean paying discount points

December 19, 2017/Scott Sheldon

Discount point are nothing more than upfront head you pay to purchase a lower interest rate and subsequently a lower monthly payment. In some case the you may not have a choice to pay discount points. Following are those ways…

It is reasonable to assume when refinancing with a lower than 660 credit score on a conventional mortgage loan and pulling cash out of a primary residence, second home or rental property will automatically mean you paying some form of a discount. No matter what interest rate you are looking at. This is a byproduct of a market that prices and hedges pricing commensurate with the cost of risk a lower credit score borrower poses.

This also means for example on an FHA mortgage and you’re doing a cash out refinancing with credit scores 580-619 you are going to be paying some amount of money in a discount point. It is not unreasonable with a credit score under 600 you may be paying as much as 1-2 discount points of your desired loan amount.

The factors that cause the discount points to come in the play is:

  • Loan to value more than 70% with credit scores under 700 on conventional loans
  • Cash out refinances greater than 70% loan to value on conventional
  • Must have goal of specific rate
  • Investment property mortgages
  • FHA Mortgages purchasing or refinancing with scores 619 or lower
  • A must have interest rate on an FHA Mortgage

Talk to your lender when you’re being quoted points. Most lenders have options to toggle between so you can see the cost-benefit for a rate. The points system works by a sliding scale. The lower the interest rate, the more cost in the form of points there will be associated with that interest-rate. The higher the interest rate the less the costs are however the more expensive the loan is over the longer-term because the interest rate is higher you subsequently pay more interest of all over the total term of the loan. A sound mortgage loan scenario would be to estimate rate and cost vs how long you will need to borrow the money for. For example, you wouldn’t want to take a loan with extra fees if you plan to sell the home before you recoup those monies anyway.

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