If a borrower is choosing between a mortgage with discount points and one withou

Question

If a borrower is choosing between a mortgage with discount points and one without discount points, what general considerations should she take into account when making her decision? More specifically if Bank A offers this borrower Loan A, which has discount points. Bank B offers this borrower Loan B, which has no points and a lower interest rate than A (but is otherwise identical to Loan A). Are there any circumstances under which she would choose to borrower from Bank A over Bank B? This question may be answered fully in 2 sentences (or bullet points). Please limit your answer to no more than 1 paragraph.

Explanation / Answer

A lender might offer you a 30-year fixed mortgage of $165,000 at 6 percent interest with no points. The monthly mortgage principal and interest payment would be $989. If you pay two points, (that’s $3,300) you might be able to drop the interest rate down to 5.5 percent, with a monthly payment of $937. The savings difference would be $52 per month. But it would take 64 months to earn back the $3,300 spent upfront via lower payments. If you’re sure you will own the house for more than 5 1/2 years, you save money by paying the points.

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