Everything you need to know about mortgage points
Read, 3 minutes
Key takeaways
- Mortgage points are fees paid to the lender for a reduced interest rate
- Terms around mortgage points vary from lender to lender
- You can calculate how many months of mortgage payments it will take for savings on reduced interest to outweigh the cost of the 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 on the buyer’s home loan. This is also called “buying down the rate.”
Points can be popular, especially when prevailing interest rates are high, because discounting your interest rate translates into lower monthly mortgage payments. But you need to do some careful—but manageable—math to determine if mortgage points will save money in your situation.
How do mortgage points work?
When you pay the fee for a mortgage point, you are essentially spending some money up front in exchange for saving money on interest later, over the life of your loan. On a 30-year fixed-rate mortgage, each point typically costs 1 percent of your total loan amount—for example on a $300,000 mortgage, each point would cost $3,000—and reduces your interest rate by 0.25 percentage points, but terms vary among lenders.
The fee for points becomes part of your loan’s closing costs, which you pay when you finalize the details of your mortgage.
How much can you save by using mortgage points?
Depending on your circumstance, buying mortgage points can save you significant money over the course of your loan. A single point can save thousands of dollars over the life of a 30-year mortgage. But keep in mind that many people don’t keep their mortgages for 30 years. If you sell your house or refinance your loan before your interest savings equal the cost of buying the points, you’ve lost money.
Are mortgage points worth it?
The key to understanding if mortgage points are worth it is to calculate the break-even point—the point at which your savings on interest cover what you paid for the points. To find it, just divide the cost of the points by the monthly payment savings. For example, if you pay $3,000 to reduce your monthly payment by $48, you’ll break even at around 63 months, or just over 5 years.
$300,000 loan
$3,000
Your up-front mortgage points cost
$48
Your monthly payment savings
63
Number of months to your break-even point
Payments beyond your break-even point are where you really start saving. For example, if it takes 63 months to hit your break-even point, you’ll still have almost 25 years left on a 30-year mortgage. Before buying mortgage points, carefully consider how long you plan to be in your house or whether you’re likely to refinance to take advantage of falling interest rates or to tap your home equity. |
Another major consideration: Do you have the available cash to pay for the mortgage points at closing? If you need to decide between making a 20 percent down payment or buying points, make sure you run the numbers. A down payment of less than 20 percent can mean also paying for private mortgage insurance (PMI), which could cancel out the benefit of buying points for a lower interest rate. |
In this hypothetical example1, a homeowner is getting a $300,000 mortgage for 30 years with an interest rate of 6%. Here’s how buying points would affect the loan.
| | Cost | New APR | Interest savings per month | Total savings over 30 years |
|---|---|---|---|---|
| 1 point | $3,000 | 5.75% | $48 | $17,256 |
| 2 points | $6,000 | 5.5% | $96 | $34,303 |
Mortgage points FAQ
- 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.
