Talk:Discount points/Archive 1

I don't think origination fees and points are the same thing. This article may be actively misleading.--Srleffler 05:37, 9 July 2006 (UTC)

You're right. They're quite different. I've got a fairly strong grasp of most financial mathematics, and I'll give this page a look when I find some time. (Feel free to come to my talk page and ask me to look at this page if I forget). Davemcarlson 05:21, 14 November 2006 (UTC)

I agree, from my understanding points are used to decide how much the origination fee is, but they are not the same thing. I would like a professional's opinion though. I work in a bank, but I'm a translator, so a lot of the technical stuff is over my head.

Yes, origination fees and points are not the same thing (in the process of buying a home now...) Buying point allows you to get a lower interest rate. The origination fee is a fee that a lender charges as part of the closing costs. --D3matt

• Also this article seems very US-centric - I for one have never heard of points in New Zealand for example. Lisiate 00:29, 3 August 2006 (UTC)

It woudl be of great help if somebody explained the meaning of "points" mathematically? Meaning, how does one arrive at 1 point ~ 0.25% in interest rate? Is a point payment of the difference in the present value of the interest the bank will collect over the next 30 years? This is not clear at all, hence the description as it stands is not useful beyond what is available on most lender's websites. - Dubravko

• I can't conjure up the math right now, but I'd recognize it if I saw it. The .25% only applies to a 30-year loan that is compounded monthly. (I've also heard that the amount is actually closer to 0.125%)
  Anyways, the concept behind it is that each point reduces the bank's net money loaned. If the bank loans $100,000 and the borrower pays 2 points ($2000) upfront, the bank effectively just loaned $98,000, even though the loan's face value (and the value upon which interest is charged) remains $100,000. Let's just say the loan was issued at a 7% rate (compounded monthly), and then after the discount points were taken into account, it fell to 6.5% (still calculated in relation to the $100,000 principal). The monthly payments corresponding to 6.5% of $100,000 are roughly equivalent to the monthly payments corresponding to 7% of $98,000, so the borrower is effectively paying 7% on the net principal loaned ($98,000). Instead of treating the loan as a $98,000 loan at 7%, the loan is treated as a $100,000 loan at 6.5%. If you have any questions, ask me on my talk page. I'm sure I could provide a better illustration if I had to. Davemcarlson 05:18, 14 November 2006 (UTC)

• Quick fix. I removed the disputed tag after moving appropriate text to origination fee. Created discount point article to redirect here (now I'm thinking it should probably be the other way around. As this was a quick fix, I'm leaving expert tags on both articles. - Ent

Requested move

Point (mortgage) → Discount point — Article generally refers to the concept as "discount point" and states that the two are interchangeable. Also, using the longer name helps to differentiate from basis point. MrZaius^talk 12:42, 14 April 2007 (UTC)

No opinion: this approach to me seems incorrect - that is, deciding what to call it. References are needed. If it is simply called points (as I recall), then Point (mortgage). If it is referred to professionally as Discount point, then the answer is obvious.--Gregalton 18:51, 14 April 2007 (UTC)

It was requested that this article be renamed but there was no consensus for it be moved. --Stemonitis 14:53, 19 April 2007 (UTC)

When is the money paid for points regained?

The article computes the number of months after which the money paid for points is regained, that is, the total savings in monthly payments because of points becomes equal to the money paid for points. It comes out to be 3.94 years in the example used and the article warns "If you leave the house before 3.94 years, you wasted money".

This is not the correct way to compute the time after which the money paid for points is regained, because each monthly payment consists of an interest payment and a payment towards the principal. There is no way to save on the principal as the whole principal has to be paid off eventually. Any savings is possible only in the interest payments. So, the correct way to find out when the money paid for points is regained, is to find the number of months after which the savings in the cumulative interest paid becomes equal to the money paid for points. At that time, the money paid for points is regained.

Running the figures in the example used in the article ($100,000, 30 years; 6% without points, 5.5% with $1500 paid in points), in an amortization calculator that shows the cumulative interest paid (I used [1]) we find that after 36 months, the cumulative interest paid without points is $17667.89, but with points it is only $16166.89, a savings of $1501 in interest payments. The $1500 paid for the points will be regained after just 3 years, not 3.94 years mentioned in the article.

If my calculation is not correct, I'd appreciate it if some one can let me know why. Thanks.

AronZ (talk) 04:09, 24 December 2007 (UTC)

Correction needed to the origination fee paragraphs too

Looks like a similar correction is needed for the paragraph about the origination fee also.

AronZ (talk) 04:09, 24 December 2007 (UTC)

The payback period calculation is not a valid financial measure and should be struck all together. This is because payback period ignores the most fundamental of finance concepts: the time value of money. If you calculated payback period using the present value of future interest payments, that would help. A second, yet separate, item to keep in mind is that your future pricipal payments will be different as will the amount of profit that you'll make on selling the property before the mortgage is held to its full life (which is usually the case). A third item is that paying points may exclude the borrow from taking advantage of future interest rate decreases. For example, the zero-point borrower may refinance his mortgage if rates drop, but the point payer has to wait for rates to drop a lot more before it's advantageous for him to refinance. If the rate decrease is modest, then the point payer may never be able to refi whereas the zero-point payer can. This entire article should be rewritten. —Preceding unsigned comment added by 144.9.56.131 (talk) 15:28, 1 February 2008 (UTC)