Points
Mortgage points are upfront fees paid to the lender to reduce your interest rate—one point equals 1% of the loan amount. Paying one point on a $400,000 loan costs $4,000 upfront and typically reduces your rate by about 0.25%. Points make sense if you plan to keep the loan long enough to recoup the upfront cost through lower monthly payments.
The math on points is straightforward: calculate your break-even period. If buying one point for $4,000 reduces your monthly payment by $60, your break-even is about 67 months (5.5 years). If you stay in the home longer, you save money. If you sell or refinance before that, you paid more than you saved.
Discount points are distinct from origination points. Discount points are prepaid interest that buys down your rate; origination points are fees the lender charges for their services. Both appear on your Loan Estimate and both cost 1% of the loan per point, but only discount points reduce your rate. Make sure you know which type you're being quoted.
Discount points paid on a home purchase mortgage may be tax-deductible in the year paid, which can improve the break-even math. Points paid on a refinance must be deducted over the life of the loan rather than all in year one. Consult a tax advisor for your specific situation.
Key Takeaway
Mortgage points are upfront fees paid to the lender to reduce your interest rate—one point equals 1% of the loan amount. Paying one point on a $400,000 loan costs $4,000 upfront and typically reduces your rate by about 0.25%. Points make sense if you plan to keep the loan long enough to recoup the upfront cost through lower monthly payments.
Related Terms
Frequently Asked Questions
Only if you'll keep the loan long enough to break even. Divide the upfront cost by your monthly savings. If your break-even is 5 years and you plan to stay 10+, buying points makes sense.
Discount points reduce your interest rate; origination points are a lender fee for processing your loan. Both cost 1% per point, but only discount points benefit you through a lower rate.
Discount points on a home purchase are often fully deductible in the year paid. Points on a refinance are deducted ratably over the loan term. Always verify with a tax professional.
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