Question

You are offered a 4% mortgage. You would like to buy down your rate to 3.5%. Your mortgage balance is $100,000. How much in points would you have to pay?

Answer 1

Answer: 2 points worth $2000

Explanation:

Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can lower your monthly mortgage payments

Mortgage points come in two varieties: origination points and discount points. In both cases, each point is typically equal to 1% of the total amount mortgaged

The purchase of each point generally lowers the interest rate on your mortgage by up to 0.25%. Most lenders provide the opportunity to purchase anywhere from one to three discount points.

Thus each point will cost $1000 i.e. 10% of 100000

And each point reduces 0.25% of rate. Thus, we require 2 points to reduce 0.5% i.e. 4% - 3.5%

Cost of 2 points will be $2000 i.e. 2×1000