Keith Gumbinger, vice president of New Jersey–based HSH Associates, which publishes consumer loan information. HSH.com
Mortgage lenders typically offer borrowers the option of lowering their interest rates by paying “discount points” at closing.If you’re in the market for a “jumbo” mortgage these days, paying discount points, which are sometimes simply called points, could be a great deal.
Each point typically costs 1% of the mortgage amount—$3,000 for a $300,000 mortgage, for example. How much each point lowers your interest rate varies, but for standard mortgages, it usually is about 0.25 percentage points, such as from 3.5% to 3.25%. But as of late 2020, paying a discount point with a jumbo mortgage could reduce your rate by more—often 0.5 to 1.0 percentage point, depending on the lender—which could reduce monthly payments by about $150 to more than $400 on a $600,000 30-year loan.
Reason for the different policy: Jumbo mortgages are those too large for lenders to easily resell on the secondary market—in 2020, that meant larger than $510,400…or in certain high-cost areas, larger than $765,600. Lenders often keep these mortgages on their books for the duration of the loans, dramatically increasing their risk. Offering attractive deals on jumbo mortgage points encourages borrowers to pay more up front, which reduces lenders’ risk during these uncertain economic times. The up-front payments also help lenders cope with their pandemic-related cash-flow problems.
What to do: When you request jumbo mortgage quotes from lenders, ask what your rate would be if you paid one or two discount points. Anything much above a 0.25-percentage-point reduction per discount point is a better-than-normal deal worth strongly considering, assuming that you can afford the added up-front expense. Obtain multiple quotes—the lender that offers the lowest mortgage rate might not offer the lowest rate when you pay points.
One caveat: Pay discount points only if you expect to stay in the home and not refinance for at least three to five years.