What Are Mortgage Points?

When you’re financing a home, your interest rate plays a major role in how much you’ll pay over time. One strategy many buyers use to lower that rate is the purchase of mortgage points, sometimes called discount points.

In this guide, we’ll explain what mortgage points are, how much they cost, how to calculate your break-even point, and when buying points makes sense.

What are Mortgage Points?

Mortgage points, sometimes called discount points, are fees that, in return, lower the interest rate of your loan. An industry phrase you may hear associated with this process is “buying down the rate” of your mortgage. Mortgage points are not to be confused with a temporary buydown.

Generally, each point costs 1 percent of your mortgage amount. That would equate to $4,500 on a $450,000 loan. The reduction in your interest rate varies by lender, but the standard reduction is 0.25 percent per point. You’ll want to check with your lender for the specific amounts available to you on your loan. It’s also important to note that some lenders allow you to buy fractions of points, which can help with budget constraints.

How Much Will Buying Points Save Me?

Mortgage points can significantly reduce your monthly mortgage payment because they lower your interest rate. To see how this works in today’s market, let’s look at a real-world example using the current average 30-year fixed mortgage rate of 6.25 percent.

Let’s assume:

• New interest rate after buying one point: 6.00 percent
• Loan amount: $450,000
• Original interest rate: 6.25 percent
• One mortgage point cost: $4,500
• Rate reduction: 0.25 percent

But what if you’re not planning to stay in the home for the whole term? In that case, you’ll want to calculate the length of time you’d need to stay in the home in order to break even or begin to profit from your investment in points.

How to Calculate Your Break-Even Point

To recover the upfront cost of your mortgage points, you need to stay in the home long enough for your monthly savings to add up to more than what you paid for the points. That timeline is called your break-even point.

There is a simple way to estimate it:

Break even point (in months) = Cost of mortgage points ÷ Monthly payment savings

Using the updated example from above:

• Loan amount: $450,000
• Original rate: 6.25 percent
• New rate with one point: 6.00 percent
• Cost of one point: $4,500
• Monthly payment without points: $2,770
• Monthly payment with points: $2,698
• Monthly savings: $72

Now plug those numbers into the formula:

• $4,500 ÷ $72 = 62.5 months

Since you cannot stay in a home for half a month, you would round up to about 63 months, which is a little more than 5 years.

In this scenario, you would need to stay in the home for at least 5 years for the purchase of your mortgage points to break even. If you stay longer than that, the interest savings you gain after the break-even point become a true financial benefit.

How to Decide if You Should Buy Mortgage Points

Most buyers decide to buy mortgage points if they will see a significant positive financial impact in the long run. If you plan to stay in your home longer than the break-even point, and you can afford to purchase the points while also leaving room in your budget for typical homeowner expenses, it can be a great cost-saving measure.

Like most financial decisions, you’ll have to carefully consider your personal finances, your budget, and your priorities. Buying a home is a very large purchase, and it’s also very personal. You’ll want to feel comfortable and confident in your decision, and that will come from being well-informed and having thoroughly reviewed your options.

Always discuss with a trusted loan officer before deciding to buy any mortgage points.

Frequently Asked Questions (FAQ)

What are mortgage discount points?

They are upfront fees paid to your lender in exchange for a lower interest rate. You are essentially prepaying part of your loan’s interest.

How much do mortgage points cost?

Each point usually costs 1% of your total loan amount. For example, one point on a $300,000 loan costs $3,000.

How much can mortgage points lower my rate?

Most lenders reduce your rate by about 0.25% per point, though the exact amount varies by loan type and market conditions.

Are mortgage points worth it?

They’re worth considering if you’ll stay in the home long enough to break even. This is usually five to seven years or more.

Are mortgage points tax-deductible?

According to IRS guidelines, the answer is yes in many cases for primary residences, but check with a tax advisor to confirm eligibility.

When buying a home, you’ve typically got a lot more to consider than just mortgage points and interest rates. You’re looking for the best home to suit your family’s needs, and often on fast-approaching deadlines.

Our team of expert loan officers are ready to help you get started with your home financing. Don’t hesitate to speak with them, as all First Heritage Mortgage loan officers will be happy to go over any aspects of the loan process with you.