by Roshan Richards

Created on: September 29, 2009   Last Updated: September 30, 2009

Most home owners will refinance their homes at some point in their lives. The good news is that not only is a refinance usually a less stressful experience than the purchase of a home, but it often becomes an opportunity to reduce one's monthly payment and save money in the long run through a reduction in rate. What some do not know, however, is that additional savings can often be gained by purchasing a deeper reduction to the rate through what is called discount points. Determining whether the purchase of discount points is right in any given refinance requires good communication with one's mortgage specialist and a little bit of number crunching.

Discount points should not be confused with origination points or a buy down. Discount points are an optional fee that the borrower chooses to pay to the lender at the time of closing to permanently reduce the rate on the loan. How much the discount points will cost is determined by the lender on a graduated scale at the time the mortgage specialist locks the loan. What the exact costs will be and how much of a discount should be purchased, if at all, should be thoroughly discussed with one's mortgage specialist and chosen by the borrower, just as the rate is discussed and agreed upon for the rate lock.

The following outlines a scenario on how to figure discount point costs and if they would be prudent for the borrower to buy:

Julie is refinancing her home at a loan amount of $150,000 at 5.75% for 30 years, making her refinanced principle and interest payment $875.36/month. After discussing the possibility of buying discount points with her mortgage specialist, she learns that the chosen lender will extend discount points at a cost of .5 points (.5% of the loan amount) for a .25 reduction to the rate, 1 point (1% of the loan amount) for a reduction of 1 to the rate, or 2 points (2% of the loan amount) for a 1.25 reduction to the rate. To figure the cost of the discount points use the following formula: Discount Points x Loan Amount = Cost

To figure the new payment, the new numbers must be plugged into a mortgage calculator. The first example has already been figured below:

.5 discount points x $150,000 = $750;

This gives Julie a .25 reduction to the beginning rate of 5.75%. 5.5% is now the permanently discounted rate at a cost of $750. Her new principle and interest payment will be $851.68/ month at this rate, making a difference of $23.68/month saved.

The question that Julie needs to ask herself here is, "Is it

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