Discount Points Explained
In the mortgage world, interest rates are almost always quoted in 1/8 increments (e.g., 6.125%, 6.25%, 6.375%). However, the true market price of a loan—the "Par" rate—rarely lands exactly on one of those numbers. Because we must align the market price with a standard rate, we use discounts or rebates to bridge the gap. Let me explain --
Credits vs. Costs
When a rate is selected, the market assigns it a price. This price is a percentage of your total loan amount:
A Rebate (Lender Credit): Choosing a rate slightly above the market "Par" can generate a credit to apply toward your closing costs.
A Discount (Points): Choosing a rate slightly below "Par" requires a fee paid at closing to "buy down" to that lower interest rate.
Note: These multipliers are determined by the market and are rarely identical. For example, a lower rate might cost a 0.25 discount, while the next rate up might only offer a 0.10 rebate.
The Impact on Your Cash Flow
While a discount is an upfront cost, the monthly and long-term savings are significant. Consider this comparison for a $300,000 loan:
At 6.375%: The monthly payment (P&I) is $1,871.61 with $373,779 in total interest paid over 30 years.
At 6.250%: The monthly payment (P&I) is $1,847.15 with $364,974 in total interest paid over 30 years.
The Result: Paying a small discount today (e.g., 0.25% -- 1/4 of 1% of the loan amount in this example -- or $750) saves you $24.46 per month and $8,805 in interest over the life of the loan.
The Risk Factor: DSCR Impact
For borrowers, the rate does more than dictate interest; it dictates eligibility. A lower interest rate improves your Debt Service Coverage Ratio (DSCR). If a higher interest rate drops your DSCR ratio from 1.26 to 1.20, it can push the loan into a higher-risk pricing bracket—ironically making the "higher" rate even more expensive—or even result in a loan denial.
My Approach:
I aim to price loans as close to Par as possible without going over. This ensures your DSCR remains strong and your long-term interest costs remain low. Unless you specifically request a lender credit to offset closing costs, I prioritize the rate that protects your investment’s bottom line.
In other words, when I issue my Estimated Fee Worksheet to you, it will probably include a "Discount" amount. This is why.
I've placed a couple of screenshots below so that you can see what this looks like.
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Disclaimer: These figures are for educational and hypothetical purposes only. This is not an advertisement for a specific interest rate, a commitment to lend, or an offer of credit. Actual rates and multipliers depend on current market conditions, credit score, loan-to-value ratio, and other qualifying factors.
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Do you have questions about DSCR loans or want a quote? Email me at hello@krisfleming.net, or Apply Here.
