What are mortgage points?
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Key takeaways
- Mortgage points are fees paid to the lender for a reduced interest rate
- Terms around mortgage points vary from lender to lender
- It’s important to consider how long you’ll own the home and the time it will take to recoup the cost of buying points
Mortgage points, also known as discount points, are fees a homebuyer pays directly to the lender (usually a bank) in exchange for a reduced interest rate. This is also called “buying down the rate.”
Essentially, you pay some interest up front in exchange for a lower interest rate over the life of your loan. Each point you buy costs 1 percent of your total loan amount.
Buying points to lower your monthly mortgage payments may make sense if you select a fixed-rate mortgage and plan on owning the home after reaching the break-even period. The break-even period is the time it takes to recoup the cost of buying points.
How much will you save when buying mortgage points?
Depending on your circumstance, buying mortgage points can save you significant money over the course of your loan. Here’s an example:
| Costs per point(s) | Monthly payment** | Total savings on a 30-year loan | |
|---|---|---|---|
| 0 points (4.5% APR*) | $0 | $1,013.37 | N/A |
| 1 point (4.25% APR*) | $2,000 | $983.88 | $10,616.40 |
| 2 points (4% APR*) | $4,000 | $954.83 | $21,074.40 |
*Sample APRs and points are for illustrative and educational purposes only and are not an actual rate quote, prequalification or commitment to lend. Actual rate buydown per point varies by loan program and market conditions.
**This is the cost of principal and interest only; taxes and insurance are not included in this example.
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Are mortgage points worth it?
When you consider whether points are right for you, it helps to run the numbers. Determine whether you have the cash available to buy points up front, in addition to your down payment, closing costs and reserves. Also, consider how long you plan to own the home. Your lender can help you decide whether paying points is right for you. Here’s how to calculate your break-even point:
$4,000
Your up-front mortgage points cost
$58.54
Your monthly payment savings
68
Number of months to reach your break-even point
Payments beyond your break-even point are where you really start saving. For example, if it takes 68 months to hit your break-even point, you would have a little more than 24 years left on a 30-year mortgage.
Other things to know about mortgage points
The terms around buying points can vary greatly from lender to lender. Here are some important things to consider:
The lender and the marketplace determine your rate reduction, and it can change after the fixed-rate period for your mortgage ends. That’s why it’s important to make sure your break-even point occurs well before the fixed-rate expires. For Bank of America customers, however, if rates go up during the adjustable period, your rate will be lower based on the points you initially purchased.
Contact a tax professional to see whether buying mortgage points could affect your tax situation.
If you need to decide between making a 20 percent down payment and buying points, make sure you run the numbers. A lower down payment can mean also paying for private mortgage insurance (PMI), which could cancel out the benefit of buying points for a lower interest rate.
* Maximum income and loan amount limits apply. Fixed-rate mortgages (purchases or no cash out refinances), primary residences only. Certain property types are ineligible. Maximum loan-to-value (“LTV”) is 97%, and maximum combined LTV is 105%. For LTV >95%, any secondary financing must be from an approved Community Second Program. Homebuyer education may be required. Other restrictions apply.
