With mortgage rates staying relatively high, it can be worth finding ways to get a lower rate. One option is paying for mortgage points — also known as discount points — to reduce your rate and save on monthly payments. But whether shelling out the cash for them is worth it depends on if you’ll stay put and keep the mortgage long enough to break even on the initial cost.
It’s not easy to decide whether to part with your hard-earned dollars, even for a lower rate. Here’s what you need to know about how mortgage points work and whether they’re worth paying.
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 fee lenders charge for processing the loan. This fee is usually required, unlike discount points that are 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 loan amount. The lender then 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 impact of a discount point varies by lender, the type of loan and overall rates. Since mortgage rates fluctuate daily, it makes sense to shop around.
“Buying points” also 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 even more.
How do mortgage points work?
Paying discount points reduces your interest rate and monthly payments. How much you’ll save each month depends on the interest rate, the amount borrowed and the loan's term (whether it's a 30-year or 15-year loan, for example).
How points change payments on a $300,000 mortgage
The table below illustrates the monthly savings from paying one or two discount points on a $300,000 mortgage with a base interest rate of 7% and a 30-year term. Without discount points, the monthly principal and interest is $1,996. The monthly payments are lower after reducing the rate by paying for one or two discount points.
Points | Cost of points | Principal and interest | Monthly savings and months to break even |
|---|---|---|---|
0 points (7% interest rate) | 0 | $1,996 | 0 |
1 point to cut rate to 6.75% | $3,000 | $1,946 | $50 per month; 60 months to break even |
2 points to cut rate to 6.5% | $6,000 | $1,896 | $100 per month; 60 months to break even |
Homeowners stay in their homes for 11 years on average before selling, according to a survey by the National Association of Realtors. If someone were to stay in their home this long, the five-year break-even point in the example above likely makes financial sense. But it really depends on what your situation is — if you think you might suddenly have to move for a job opportunity, for example, then maybe paying a few thousand dollars more isn’t worth it.
Should you buy points?
If you can afford them, then deciding whether to pay for points depends on if you’ll stay in the home long enough to hit the break-even point.
When the total monthly savings equals the upfront fee you’ve paid, then you've hit the break-even point. After that, you come out ahead. But if you sell the home or refinance the mortgage before that, you’ll lose money on the discount points you paid.
How long it takes to break even depends on your loan size, interest rate and term. It's usually more than just a few years. You can calculate when you'll break even using our calculator below.
Frequently Asked Questions
Can you negotiate discount points on a mortgage?
Yes, you can. Some lenders may add discount points to your loan offer to make it more attractive — even if you didn't ask to buy discount points. In fact, when shopping lenders, it's a good idea to ask for a loan offer with zero points or the same number of points. That way you can compare one lender with another on an equal basis. You can always decide to buy discount points after you choose the mortgage lender you'll be doing business with.
Can you buy discount points after closing?
No, the terms of your loan are set before closing. When you sign that towering stack of paperwork, the deal is done.
Can the home seller pay your discount points?
Yes. In a buyer's market, it's not unusual for sellers to offer to pay the purchaser's discount points. In this case, you'll save money from the beginning, and there's no need to calculate your break-even point.
Are mortgage points tax deductible?
If you itemize your tax deductions, you might be able to deduct mortgage points — even if the seller paid for the points. This applies only to a mortgage for your primary residence, though, and you can’t deduct the points if you take the standard tax deduction. This can also be limited by how much you borrow to buy the home. In some cases, you might have to spread out the deductions throughout your loan term (instead of deducting them all at once). You can ask a tax advisor to walk you through the process.
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