Mortgage Points: Should You Pay These Optional Fees?

Mortgage points, also known as discount points, are fees you pay to reduce the mortgage interest rate and monthly payment.
Barbara Marquand
Hal M. Bundrick, CFP®
By Hal M. Bundrick, CFP® and  Barbara Marquand 
Updated
Edited by Dawnielle Robinson-Walker Reviewed by Michael Soon Lee

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What are mortgage points?

Mortgage points, also known as discount points, are fees you pay a lender to reduce the interest rate on a mortgage. Paying for discount points is often called “buying down the rate” and is optional for the borrower.

As you search for the lender with the best offer, be careful when looking at mortgage rates advertised online. Reading the fine print, you may find that one, two — or even three or more — discount points have been factored into the rates. You'll want to find out what a lender's rate is without adding a bunch of upfront fees.

Did you know...

Sometimes lenders call origination fees "points." An origination fee is a one-time charge the lender adds for processing the loan. Unlike discount points, an origination fee isn't optional.

How much does one mortgage point reduce the rate?

When you buy one discount point, you’ll pay a fee of 1% of the mortgage amount. As a result, the lender typically cuts the interest rate by 0.25%.

But one point can reduce the rate more or less than that. There’s no set amount for how much a discount point will reduce the rate. The effect of a discount point varies by the lender, type of loan and prevailing rates, as mortgage rates fluctuate daily — so it makes sense to shop around.

“Buying points” doesn't always mean paying exactly 1% of the loan amount. For example, you might be able to pay half a point, or 0.5% of the loan amount. That typically would reduce the interest rate by 0.125%. Or you might be given the option of paying 1.5 points or two points to cut the interest rate more.

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