What are Mortgage Points (Discount Points)?
Mortgage points, also known as discount points, are fees you pay directly to the lender at closing in exchange for a reduced interest rate on your loan. This practice is also known as "buying down the rate."
How Do Mortgage Points Work?
One mortgage point costs exactly 1% of your total loan amount. The CFPB explains discount points and how to calculate whether buying down your rate makes financial sense for your situation.
If you are borrowing $300,000 to buy a house, one point will cost you $3,000. Paying this $3,000 at closing will typically lower your interest rate by 0.25% for the entire lifespan of your 30-year loan.
You are essentially paying some of your interest upfront in a lump sum, which lowers your monthly payments moving forward.
Are Mortgage Points Worth It?
Buying points is only worth it if you plan to stay in the home (and keep the mortgage without refinancing) long enough to reach your break-even point.
To calculate your break-even point, divide the upfront cost of the points by your monthly savings:
- Cost of 1 Point: $3,000
- Monthly Savings from lower rate: $50
- Break-Even Point: $3,000 ÷ $50 = 60 months (5 years)
In this scenario, if you plan to move or refinance before 5 years, buying points is a waste of money because you will not recoup the upfront cost. If you plan to live in the house for 10+ years, buying points will save you thousands of dollars in interest over the long term.
