What Are Mortgage Points?
If you’re exploring ways to save money on your home loan, you might have come across the term “mortgage points.” But what exactly are they? Mortgage points, sometimes called “discount points,” are fees you pay directly to your lender at closing in exchange for a reduced interest rate on your mortgage. In simple terms, buying mortgage points lets you pay some interest upfront to lower your monthly payments over the life of the loan.
Understanding the Basics
One mortgage point typically equals 1% of your total loan amount. For example, if you’re taking out a $300,000 mortgage, one point would cost $3,000. By paying for points at closing, you can secure a lower interest rate, which means you’ll pay less in interest over time.
Why Do Lenders Offer Mortgage Points?
Lenders offer mortgage points as an option for borrowers who want to reduce their long-term costs. It’s a win-win: lenders receive more money upfront, and homeowners get the benefit of lower monthly payments. This option is especially attractive if you plan to stay in your home for many years because the savings from a lower rate can really add up over time.
Mortgage Points At a Glance
| Term | Definition | Benefit |
|---|---|---|
| Mortgage Point | A fee equal to 1% of your total loan amount paid at closing | Lowers your interest rate and monthly payment |
| Discount Point | Another name for mortgage point; specifically used to buy down the interest rate | Saves money on interest over the life of the loan |
| Lender Credit (Negative Point) | The opposite of paying for points; receive credit for accepting a higher rate | Lowers upfront costs but increases monthly payment |
Morgage points can be a smart way to save money, depending on your long-term plans and financial goals. Understanding how they work is the first step toward making informed decisions about your mortgage options.
2. How Mortgage Points Work
What Are Mortgage Points?
Mortgage points, also known as “discount points,” are upfront fees you pay to your lender at closing in exchange for a reduced interest rate on your home loan. Each point typically costs 1% of your total loan amount.
The Cost of Mortgage Points
The cost of a mortgage point is simple to calculate. For every point you buy, you pay 1% of your total mortgage amount. Here’s a quick example:
| Loan Amount | Cost of 1 Point (1%) | Cost of 2 Points (2%) |
|---|---|---|
| $300,000 | $3,000 | $6,000 |
| $400,000 | $4,000 | $8,000 |
| $500,000 | $5,000 | $10,000 |
How Points Impact Your Interest Rate
Buying mortgage points lowers your interest rate. Typically, one point reduces your rate by about 0.25%, but this can vary between lenders and loan types. For example, if your original rate is 7%, buying one point may bring it down to 6.75%. Here’s how that might look:
| Points Purchased | Interest Rate Reduction | New Interest Rate (Original: 7%) |
|---|---|---|
| 0 (No Points) | 0% | 7.00% |
| 1 Point | -0.25% | 6.75% |
| 2 Points | -0.50% | 6.50% |
When Do You Pay for Points?
You pay for mortgage points upfront at the closing table when you finalize your home purchase or refinance. This means you’ll need the extra cash on hand at closing if you decide to buy points.
3. Types of Mortgage Points: Discount Points vs. Origination Points
When you’re looking at a mortgage offer, you’ll probably see something called “points.” But not all points are the same! In the U.S., there are two main types of mortgage points: discount points and origination points. Knowing the difference can help you make smart choices and potentially save a lot of money on your home loan.
What Are Discount Points?
Discount points are basically prepaid interest that you can choose to pay at closing in exchange for a lower interest rate on your mortgage. One point usually costs 1% of your total loan amount. For example, if you’re borrowing $300,000, one point would cost $3,000.
How Do Discount Points Work?
When you buy discount points, your lender will lower your interest rate—typically by about 0.25% per point (though this can vary). This means you’ll have a lower monthly payment and pay less interest over the life of your loan. The more points you buy, the lower your rate goes.
Example: Buying Discount Points
| No Points | With 1 Point | |
|---|---|---|
| Loan Amount | $300,000 | $300,000 |
| Interest Rate | 6.00% | 5.75% |
| Monthly Payment (Principal & Interest) | $1,799 | $1,750 |
| Cost for 1 Point | $0 | $3,000 (at closing) |
You pay more upfront but save each month with a lower payment.
What Are Origination Points?
Origination points are fees that lenders charge to process your loan application. Like discount points, one origination point equals 1% of your loan amount. These don’t lower your interest rate; they’re just an extra cost for getting the loan set up.
How Do Origination Points Affect Your Mortgage?
Origination points add to your closing costs but do not reduce your interest rate or monthly payments. They’re basically part of the lender’s compensation for working on your loan.
Quick Comparison Table
| Discount Points | Origination Points | |
|---|---|---|
| Main Purpose | Lower your interest rate and monthly payment | Lender’s fee for processing the loan |
| Effect on Interest Rate | Lowers it (permanently) | No effect |
| Pays For | Prepaid interest on the loan | Lender’s administrative costs |
| Optional? | Yes—you choose whether to buy them or not | Sometimes negotiable, sometimes required by lender |
| Tax Deductible? | Often yes (check with a tax professional) | No (usually not deductible) |
This breakdown can help you decide which type of point makes sense for you—or if paying any points at all fits your financial situation and homeownership goals.
4. When Does Buying Points Make Sense?
Understanding the Break-Even Period
Before deciding to buy mortgage points, it’s important to know when you’ll start to actually save money. This happens at what’s called the “break-even period.” The break-even period is the time it takes for your monthly savings from a lower interest rate to add up and cover the upfront cost of buying points.
How to Calculate Your Break-Even Period
| Details | Example Calculation |
|---|---|
| Cost of 1 Point (1% of loan amount) | $2,000 on a $200,000 loan |
| Monthly Savings (from lower rate) | $30 per month |
| Break-Even Period | $2,000 ÷ $30 ≈ 67 months (about 5.6 years) |
If you plan on staying in your home longer than the break-even period, buying points could be a smart move.
Other Factors to Consider Before Buying Points
- Your Long-Term Plans: If you think you might sell your house or refinance before reaching the break-even period, buying points probably won’t save you money.
- Your Available Cash: Buying points means paying more upfront at closing. Make sure you still have enough cash left over for moving costs, emergency savings, and other expenses.
- Your Interest Rate Goals: Sometimes lenders offer different deals on points. Compare offers from several lenders to see if buying points really gives you the best rate for your situation.
- Your Tax Situation: In some cases, mortgage points can be tax-deductible. Talk to a tax professional to see if this benefit applies to you.
Quick Guide: Is Buying Points Right for You?
| Situation | Might Make Sense? |
|---|---|
| You plan to stay in your home long-term (over 5 years) | Yes |
| You have enough cash for upfront costs and emergencies | Yes |
| You expect to move or refinance soon (within a few years) | No |
| You’re tight on cash at closing | No |
| Your lender’s point offer doesn’t reduce your rate much | No |
The Bottom Line on Buying Points
Buying mortgage points can be a great way to save money over time, but only if it fits with your financial goals and plans for your home. Be sure to crunch the numbers, compare lender offers, and think about how long you’ll keep your mortgage before making a decision.
5. Tips for Deciding If Mortgage Points Are Right for You
When it comes to mortgage points, making the right choice can help you save money over the life of your loan. Here’s how to figure out if buying mortgage points makes sense for you based on today’s rates, your financial goals, and what’s happening in the housing market.
Understand Your Break-Even Point
The break-even point is how long it takes before the savings from a lower interest rate outweigh the upfront cost of purchasing points. If you plan to stay in your home beyond this period, buying points could be a smart move. Use the table below as an example:
| Number of Points Purchased | Upfront Cost (on $300,000 loan) | Monthly Payment Savings | Break-Even Time |
|---|---|---|---|
| 1 Point | $3,000 | $50 | 5 Years |
| 2 Points | $6,000 | $100 | 5 Years |
If you expect to move or refinance before reaching the break-even point, paying for points may not be beneficial.
Check Current Interest Rates and Market Trends
Mortgage rates change frequently. Sometimes, rates are already low and paying for additional reduction with points doesn’t make much difference. In a rising-rate environment, however, locking in a lower rate with points can offer significant savings over time. Stay updated on current rates and ask your lender how much you can actually save by purchasing points.
Align with Your Financial Goals
Your personal situation matters. Consider these questions:
- How long do I plan to stay in my home?
- Do I have enough cash for both the down payment and mortgage points?
- Would I rather have a lower monthly payment or keep more cash up front?
If your goal is long-term savings and you have extra cash available, buying points may be worth it. But if you’re tight on funds at closing, it might be better to skip points and keep that money for other expenses.
Consider Tax Implications
In many cases, mortgage points are tax-deductible if they are used to buy or improve your primary residence. Check with a tax advisor to see how this could affect your overall costs and benefits.
Example: Comparing Two Scenarios
| No Points | With 1 Point ($3,000) | |
|---|---|---|
| Interest Rate | 7% | 6.75% |
| Monthly Payment (Principal & Interest) | $1,996 | $1,946 |
| Savings Per Month | – | $50 |
| Total Savings Over 10 Years* | – | $6,000* |
| *Before taxes; assumes no refinancing or selling. | ||
This kind of side-by-side comparison can help you decide if paying for points fits your plans.
Ask Your Lender Questions
- How much will each point lower my rate?
- What’s my break-even point?
- Are there any restrictions or limits on buying points?
A good lender should be able to walk you through all the numbers so you feel confident about your decision.
The Bottom Line: Personalize Your Approach
No two buyers are alike. Take time to crunch the numbers and think about what works best for your situation before deciding whether mortgage points are a good fit for your home purchase.
