When shopping for a mortgage, you may come across the option to buy discount mortgage points to lower your interest rate. But are they worth it? Understanding how mortgage points work with costs and savings can help you decide whether paying upfront for a lower rate makes sense for your home loan.
In this guide, we’ll break down what mortgage points are, how they impact your loan, and when buying points might be a smart move.
What Are Mortgage Points?
Mortgage points, also called discount points, are fees paid upfront to a lender in exchange for a lower interest rate on your home loan. This process is often referred to as “buying down the rate.”
Each point typically costs 1% of the loan amount and reduces the interest rate by about 0.25%.
Example of Mortgage Points
Let’s say you’re taking out a $400,000 mortgage:
- Buying 1 point costs $4,000 and could lower your rate from 7.0% to 6.75%
- Buying 2 points costs $8,000 and could reduce your rate further to 6.5%
The lower interest rate reduces your monthly payment and total interest paid over the life of the loan.
Discount Points vs. Origination Points
It’s important to distinguish between discount points and origination points:
- Discount Points: Reduce your mortgage interest rate and are optional.
- Origination Points: Fees charged by lenders to process your loan but do not lower your rate.
Not all lenders charge origination points, and some offer no-closing-cost loans by increasing the interest rate instead of requiring upfront fees.
How Much Can You Save with Discount Points?
If you’re planning to stay in your home long-term, buying points can lead to significant savings. Here’s how it plays out over a 30-year loan:
| Without Points | With 1 Point | With 2 Points |
|---|---|---|
| Interest Rate | 7.0% | 6.75% |
| Cost of Points | $0 | $4,000 |
| Monthly Payment | $2,661 | $2,594 |
| Total Interest Paid | $558,036 | $533,981 |
| Total Interest Savings | $0 | $24,055 |
In this example, spending $8,000 upfront saves nearly $48,000 in interest over 30 years—a major long-term benefit.
How to Calculate the Breakeven Point
To determine whether mortgage points are a good investment, calculate the breakeven point—the time it takes for interest savings to exceed the upfront cost.
Formula:
Cost of points ÷ Monthly savings = Breakeven in months
Using the previous example:
$4,000 ÷ $133 = 30 months (or 2.5 years)
If you stay in your home for at least 2.5 years, buying points is worthwhile. But if you plan to sell or refinance before then, the upfront cost may not be worth it.
Permanent vs. Temporary Rate Buydowns
There are two types of mortgage buydowns:
Permanent Buydown
- Buying discount points lowers your interest rate for the entire loan term.
- This strategy is best for long-term homeowners.
Temporary Buydown
- A lender, builder, or seller covers the cost of lowering your interest rate temporarily.
- A 3-2-1 buydown, for example, lowers the rate by 3% in year one, 2% in year two, and 1% in year three, before returning to the original rate.
This is common in new home purchases where sellers offer incentives to attract buyers.
Pros and Cons of Mortgage Points
Pros
- Lower Interest Rate – Reduces monthly payments and total interest paid.
- Long-Term Savings – The longer you keep the mortgage, the more you benefit.
- Tax Deductible – Mortgage points may be tax-deductible if you itemize deductions.
Cons
- High Upfront Cost – Paying thousands at closing may not be feasible for all buyers.
- Long Breakeven Period – If you sell or refinance early, you may not recoup the cost.
- Alternative Uses for Cash – You may get better returns by using the funds for a larger down payment or other investments.
Should You Buy Points on Your Loan?
Buying points can be a smart move if you plan to stay in your home for several years and want to save on long-term interest costs.
Consider buying points if:
-You plan to stay in the home long-term (5+ years).
-You can comfortably afford the upfront cost.
-You want to lower your monthly mortgage payment.
Skip buying points if:
-You plan to move or refinance soon.
-You need the cash for a down payment, closing costs, or other expenses.
-You want to invest the money elsewhere for a higher return.
Mortgage points offer a way to lower your interest rate and save money over time, but they come with upfront costs. Before deciding, crunch the numbers and compare the breakeven point to your homeownership plans.
Tip: If you’re unsure whether buying points is worth it, ask your lender for loan estimates with and without points to compare the long-term savings.
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