When purchasing a home or refinancing a mortgage, understanding the different options available can help you make informed decisions. Two common terms are discount points and rate locks. Although they both relate to mortgage interest rates, they serve different purposes and have distinct effects on your loan.
What Are Discount Points?
Discount points are fees paid upfront to the lender in exchange for a lower interest rate on your mortgage. Each point typically costs 1% of the loan amount and can reduce your interest rate by a certain percentage, often around 0.25%. Paying points can save you money over the life of the loan if you plan to stay in the home for a long period.
What Is a Rate Lock?
A rate lock is an agreement between you and your lender that guarantees a specific interest rate for a set period. This protects you from rising interest rates during the loan processing time. Rate locks are typically available for 30 to 60 days, and some lenders may charge a fee for this service.
Key Differences
The main difference is that discount points are paid to lower your interest rate permanently, while a rate lock is a temporary guarantee of the current rate during the loan process. Paying points can lead to long-term savings, whereas a rate lock provides security against rate fluctuations during the closing period.
- Cost: Points require an upfront fee; rate locks may have a fee or be free.
- Duration: Points affect the long-term rate; rate locks last for a limited period.
- Purpose: Points lower the interest rate permanently; rate locks prevent rate increases during processing.