“Is it worth paying more upfront to save over time?” That’s a question many homebuyers ask when faced with the option to purchase mortgage discount points. Whether you’re navigating the home buying process for the first time or adding to your portfolio as a seasoned investor, understanding how discount points work—and when to consider them—can have a major impact on your long-term financial goals.
This guide explains everything you need to know about mortgage discount points in clear, relatable terms, with real-life examples and strategies to help you decide what’s best for your situation.
What Are Mortgage Discount Points and Should You Pay for Them?
Mortgage discount points, also simply referred to as “points”, are optional upfront payments made to your lender at closing in exchange for a reduced mortgage interest rate.
Put simply, you’re paying some of the interest upfront to get a better deal on your monthly mortgage payments over time.
How It Works:
- One point typically equals 1% of your total loan amount.
- Buying one point can reduce your interest rate by around 0.25%—though this may vary depending on the lender, market conditions, and loan type.
In essence, it’s a trade-off: upfront cash now for long-term savings.
A Simple Example
Let’s say you’re borrowing $300,000 for a 30-year fixed mortgage:
- Interest Rate without points: 7.00%
- Interest Rate with 1 point: 6.75%
- Cost of 1 point: $3,000 (1% of $300,000)
In this scenario:
- Your monthly principal & interest payment without points is around $1,996
- With 1 point paid upfront, your new monthly payment drops to about $1,946
That’s a $50/month savings, adding up to:
- $600/year
- $6,000 over 10 years
- $18,000 over the life of the loan
Now ask yourself: Would you pay $3,000 today to potentially save $18,000 over time? That’s the heart of this decision.
Key Terms to Know
To better understand the concept, let’s break down some common terms:
- Discount Point: A fee paid upfront to lower your interest rate.
- Buydown: The process of paying points to reduce your rate.
- Breakeven Point: The amount of time it takes for the monthly savings to outweigh the upfront cost.
Understanding these terms helps you calculate if—and when—paying points makes financial sense.
Why Buy Mortgage Discount Points?
There are several reasons a buyer might consider paying discount points. These include:
1. Lowering Your Monthly Payment
Buying points reduces your monthly financial burden, especially helpful for buyers on a fixed income or tight budget.
2. Maximizing Long-Term Savings
If you plan to stay in the home long-term (typically 5 years or more), you’re more likely to recoup the cost of points and come out ahead financially.
3. Securing a Better Interest Rate
In rising-rate environments, locking in a lower rate could protect you from paying thousands more over time.
When Buying Points May Not Make Sense
While the potential benefits are clear, there are scenarios where purchasing discount points might not be the best strategy:
1. Short-Term Ownership
If you plan to sell or refinance your home within a few years, you may never hit the breakeven point and will lose the upfront investment.
2. Limited Upfront Funds
Discount points add to your closing costs. If your budget is already stretched thin, it may be better to preserve your cash for emergencies or home upgrades.
3. High Opportunity Cost
Paying thousands upfront means tying up money that could be invested elsewhere—possibly at a higher return.
Calculating Your Breakeven Point
The breakeven point is one of the most important calculations when deciding whether to buy points.
Here’s how you calculate it:
Breakeven Point (in months) = Cost of Points ÷ Monthly Savings
Using the earlier example:
- Cost of points = $3,000
- Monthly savings = $50
Breakeven = $3,000 ÷ $50 = 60 months (5 years)
So, you would need to stay in the home for at least 5 years to make paying for points worthwhile.
If you sell or refinance before that, you’ll lose money.
First-Time Buyers vs. Real Estate Investors
First-Time Homebuyers:
First-timers often face tighter budgets and may prioritize minimizing upfront costs. If you’re unsure how long you’ll stay in the home, skipping points may be wise. However, if you know this is your “forever home” and can afford it, the long-term savings could be significant.
Seasoned Investors:
Real estate investors tend to run strict numbers. If the return on points outpaces other investments, it could be worthwhile—especially for long-term rental properties. However, flippers and short-term holders rarely benefit from paying points, as they won’t own the property long enough to realize the savings.
Should You Pay for Points on Adjustable-Rate Mortgages (ARMs)?
Mortgage discount points can also apply to adjustable-rate mortgages (ARMs), but be cautious.
Because ARMs typically have a low fixed rate for a few years before adjusting, paying for a lower initial rate may not deliver as much value. In many cases, it’s better to apply points to fixed-rate loans, especially if you plan to hold the mortgage long term.
Questions to Ask Before Buying Mortgage Points
Before making a decision, ask yourself these questions:
- How long do I plan to live in this home?
- Can I afford the additional upfront costs comfortably?
- Will this help me achieve a better long-term interest rate?
- What’s my breakeven point, and does it fit my timeline?
- Would that money be better spent elsewhere—such as upgrades or investments?
Mortgage Discount Points vs. Origination Points
It’s important not to confuse discount points with origination points.
- Discount Points: Lower your interest rate.
- Origination Points: Fees charged by the lender to process your loan (not tied to interest rate reduction).
Only discount points contribute to long-term savings. Make sure you ask your lender which type is being quoted.
Practical Tips Before Paying for Points
- Always shop around: Different lenders offer varying terms and discounts for points.
- Ask for a loan estimate: This document clearly outlines how much you’re paying and what you’re saving.
- Do the math: Use a breakeven analysis to decide what’s best for your situation.
- Negotiate with sellers: In some cases, the seller may agree to cover points as part of the deal.
- Speak with a financial advisor: Especially if you’re unsure how points will impact your overall financial plan.
Final Thoughts
Mortgage discount points offer a clear benefit: lower interest rates in exchange for upfront payments. But whether that benefit works in your favor depends on your specific goals and timeline.
For long-term homeowners or rental property investors, discount points can result in substantial interest savings. But for short-term occupants or cash-strapped buyers, the extra cost may not justify the benefit.
Ultimately, it’s about understanding the numbers, your financial flexibility, and your future plans.
