Lower Rate Does Not Always Mean Lower Cost
- Mar 4
- 1 min read
When most homebuyers compare mortgage quotes, the first thing they look at is the interest rate. A lower rate sounds better, and it often grabs the most attention.
But there is an important detail many borrowers do not realize.
Sometimes the lower rate comes with discount points, which means you are paying money at closing to obtain that lower interest rate.
Discount points are essentially prepaid interest. In most cases, one point equals 1 percent of the loan amount. On a $400,000 mortgage, for example, one point would equal $4,000.
Here is a simple example.
One lender may quote 6.25% with $6,000 in points.Another may quote 6.50% with little or no points.
At first glance, the lower rate may look like the obvious choice. But the real question is how long you plan to keep the loan.
If the lower rate saves about $100 per month, it could take five years to recover the $6,000 paid upfront. If you refinance or sell before then, paying the points may not have been the better option.
That is why when reviewing a Loan Estimate it is important to look beyond the interest rate. Discount points typically appear on Page 2 in Section A, called Origination Charges.
Before choosing a lender based only on the rate, make sure you understand whether that rate is being bought.
If you would like a second set of eyes on a Loan Estimate, feel free to reach out. We are always happy to help you make sense of the numbers.
