Adjustable Rate Mortgage Initial Discounts

Home buyers looking to lower their total cost of financing can often explore more sophisticated options available in their mortgage loans. One example is purchasing initial mortgage rate discounts by paying down points on the loan. When used in conjunction with an adjustable rate mortgage, an ARM initial discount could result in a significantly low-interest introductory period.

How Buying Initial Discounts Works

Banks, credit unions and other financial institutions that lend money to home buyers have created tools to make mortgages more affordable. One of these tools are initial discounts, which can be purchased by the borrower to lower the interest rate on a home loan. Generally, purchasing one point will reduce the interest rate by .25 percent.

Are Initial Discounts a Good Idea?

These initial discounts, sometimes referred to as initial-year discounts, are very tempting. For many people, it could be a deciding factor in what makes them choose a specific loan that a bank offers. Initial discounts on a mortgage loan can be a great way for home buyers to provide themselves with a little breathing room during their first few years of home ownership.

By having smaller monthly payments, you get extra time to recover from the large down payment and other costs associated with purchasing a home. However, it often takes a long time to break even when using this tactic. In the case of an adjustable rate mortgage, your rate might reset before you’ve had a change to reap any savings. That’s why it’s important to calculate the difference between what you’re paying up front and what you’ll pay over the life of the loan to be sure you’re actually saving money by using initial discounts.