What Are Mortgage Points?

While overall mortgage interest rates are set by the broader financial market, homebuyers taking out a mortgage can reduce the interest rate on their loan — at least a little bit — by buying mortgage points, also known as discount points.

How Do Mortgage Points Work?

One mortgage point costs 1% of your loan amount. One point on a $500,000 loan would cost $5,000, 2 points would cost $10,000, and so on. You can purchase points in fractional amounts, usually down to one-eighth of a point.

Mortgage lenders are required to lower your interest rate with each point you buy. The exact reduction in your interest rate varies by lender, loan type, and market conditions. In general, you can expect an interest rate reduction of 0.25 percentage points for each mortgage point you buy.

If you do buy points, they will be listed on Page 2 of both your loan estimate and closing disclosure.

The break-even point

Your break-even point is how long it takes for the amount you save on your monthly mortgage payment from the reduced interest rate to exceed what you paid for points. If you move or refinance before the break-even point, you’ll lose money on buying points.

For example, buying 2 points on a $500,000 loan costs $10,000 and reduces your interest rate from 6% to 5.5%. That shrinks your monthly payment from $3,021 to $2,886, saving you $135 per month. To calculate your break-even point in months, divide the cost of points by the monthly savings:

10,000 ÷ 135 = 74.1

This means your break-even point is 75 months, so you’ll need to stay in the home for at least six years and three months for the interest rate reduction to begin saving you money.

Here’s a look at how much you could save on interest by buying points, and how long it will take to break even:

Paying points vs. making a larger down payment

While buying points saves you money in the long term, it’s also possible to save money on interest by making a larger down payment. Putting more money down means you borrow less money, which reduces your monthly payments. You also don’t have to wait several years to break even, which means you can move homes or refinance your loan after only a few years without losing money on points.

“Making a larger down payment is another way to lower your monthly mortgage payments and potentially avoid paying mortgage insurance, but it does not have the same impact on the interest rate as buying points,” says Adie Kriegstein, a real estate agent and founder of the NYC Experience Team at Compass in New York. “In general, it’s a good idea to compare the costs and benefits of both options and consult with a mortgage professional to determine the best approach for your specific situation.”

For example, suppose you took out a 30-year fixed-rate loan for $500,000 at a 6% interest rate, and you have $5,000 set aside that you can either spend on points or a larger down payment. If you add the money to the down payment, then you’ll reduce your loan balance to $495,000, have a $2,967 monthly payment, and pay $573,399 in total interest.

Here’s look at some different outcomes from putting cash toward the down payment instead of points: 

Comparing this with the previous example, putting $5,000 toward points would save you $49 a month and $22,968 in interest compared to using the money for a larger down payment.

How To Shop For Mortgage Points

It’s important to shop around for your home loan and compare each lender’s offer before choosing a mortgage. Buying 1 point with one lender doesn’t necessarily get you a lower interest rate than buying no points with another lender.

One figure that can help you compare the different costs of each loan offer is the annual percentage rate. APR gives you the yearly cost of a loan, represented as a percentage rate. APR includes your interest rate plus other fees — like the cost of points. Paying attention to APR will help you directly compare the cost of each loan offer.

Can you negotiate points?

Discount points can be negotiable, but it’s going to depend on the lender or bank you’re working with. Some lenders may be willing to negotiate if you’ve gotten more competitive rates from other lenders. If you can submit proof, the lender may agree to match that price.

However, you typically can’t control how much your lender will reduce your interest rate, as this also can be tied to your credit score and financial history.

Pros and Cons of Buying Points on a Mortgage

There are benefits and drawbacks to consider when deciding if you should buy points on a mortgage.

“The pros of buying points include a lower interest rate, lower monthly mortgage payments, and potential savings on total interest paid over the life of the loan,” Kriegstein says. “The cons include the upfront cost, which can be significant, and the fact that the savings only materialize over time, so you need to be in the home for a long time to make it worth it.”

FAQ

Here are answers to some frequently asked questions about mortgage points.

Is it worth it to pay points on a mortgage?

It can be worth paying points on a mortgage if you want to lower your monthly payment and pay less interest. However, you’ll need to stay in the home long enough to recoup the costs. If your down payment is less than 20%, then you may want to put the money you would have spent on points toward a larger down payment instead. This can help you avoid having to purchase private mortgage insurance.

Are points tax-deductible?

Points can be tax-deductible because discount points technically qualify as prepaid mortgage interest.

Who pays the discount points?

The borrower pays the discount points as part of their closing costs when they close on their loan.