Real Estate
January 23, 2018
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Mortgage scenarios can lead to paying discount points

By: Scott Sheldon
December 22, 2017

Discount points are nothing more than upfront head you pay to purchase a lower interest rate and subsequently a lower monthly payment. In some cases you may not have a choice to pay discount points. 

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 percent with credit scores under 700 on conventional loans

•Cash out refinances greater than 70 percent 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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Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at