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The difference between mortgage rebate and points

What does it mean when a lender charges you .125 for a 3.75% mortgage rate and gives you .375 for a 3.875% rate. This is for a $180,000 30 year mortgage.

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

If you are charged .125 points to receive an interest rate of 3.750% that means you are paying .125 discount points to lower your interest rate. Borrowers can elect to pay discount points to lower their mortgage rate. We provide a comprehensive overview of mortgage discount points on FREEandCLEAR. One discount point equals 1.0% of the mortgage amount. So in your case, paying .125 discount points on a $180,000 mortgage means that you decide to pay an extra $226.25 to lower your interest rate (.125% * $180,000 = $226.25) to 3.750%.

The second scenario where you receive .375 points to receive a 3.875% interest rate means that you are getting a rebate (instead of paying discount points) but you pay a higher interest rate. The rebate can be used to offset your mortgage closing costs and fees. In your case, a .375 point rebate on a $180,000 mortgage means that you receive a rebate of $678.75 (.375% * $180,000 = $678.75) but you pay a higher interest rate which means your monthly mortgage payment and total interest expense over the life of your mortgage are higher.

In the first scenario where you pay the .125 discount points for the 3.75% interest rate your monthly payment is $838. In the second scenario where you receive a rebate of .375 and pay an interest rate of 3.875% your monthly payment is $851. So by paying the .125 discount points you save $13 on your monthly mortgage payment.

The decision of if you should pay discount points to lower your interest rate depends on how long you plan on owning the home and paying the mortgage. As a general rule, if you are going to own the home and pay the mortgage for less than five years then it does not make sense to pay discount points. But if you are going to own the home and pay the mortgage for longer than five years then it usually makes sense to pay discount points because you can recover the upfront cost of the points by making a lower monthly mortgage payment over a longer period of time.

In your case, the 3.750% mortgage with the .125 discount points saves you $13 per month but costs you $905.00 more ($226.25 + 678.75 = $905.00). Dividing $905 by $13 in monthly savings means it takes you approximately 69 months, or five years and nine months, to breakeven, or recover the extra cost if you decide to pay the .125 in discount points. You can use our Mortgage Discount Point Calculator to compare mortgages with different interest rates and discount points to help you determine the right option for you.

Finally, we always recommend that you shop multiple lenders to find the mortgage with the best terms. You can review lenders in your area by clicking INTEREST RATES It appears that multiple lenders on FREEandCLEAR offer lower mortgage rates than the interest rates used in your question. We advise you to contact at least four lenders as comparing proposals is the best way to save money on your mortgage.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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