What Are Points on a Mortgage?

“What are points on a mortgage?” is a common question. Mortgage or discount points are fees paid upfront to lower your mortgage interest rate. This can significantly reduce your monthly payments and is a strategic option for long-term savings. For instance, buying mortgage points could offset the initial cost with substantial interest savings over time if you plan to stay in your home for many years.

However, if you expect to move or refinance within a few years, the upfront expense might outweigh the benefits. When you have extra funds, assess whether to invest in mortgage points or increase your down payment because each offers advantages. Understanding the impact of mortgage points on your borrowing experience can help you make more informed decisions.

Mortgage points, also known as discount points, are fees paid upfront to lower your mortgage interest rate. According to the Consumer Financial Protection Bureau, the number of borrowers who paid mortgage points for home purchase loans rose from 30.5% in 2021 to 57.5% in 2023, reflecting a growing trend among homebuyers. This coincides with the increase in interest rates, which, for a 30-year fixed-rate mortgage, have gone from under 3% to a little over 7% in that time, as reported by FRED Economic Data.

Each mortgage point costs 1% of the loan amount and typically reduces your interest rate by 0.25%. This increases your upfront costs but can lead to significant long-term savings. The details of any mortgage points purchased will be outlined in your Loan Estimate and Closing Disclosure documents.

Buying mortgage points can significantly impact your monthly payment by reducing your interest rate. Typically, each point lowers your rate by 0.25%, though this can vary between lenders.

The following table below shows how buying mortgage points can affect your monthly mortgage payments.

The table illustrates a 30-year fixed-rate mortgage scenario with a $250,000 loan and a 5% down payment. Without mortgage points, the monthly principal and interest payment is $1,661.

By buying mortgage points, specifically purchasing 4 points, your monthly payment decreases to $1,501. This reduction translates to a total interest savings of $57,413 over the life of the loan.

The pros and cons of mortgage points hinge on long-term savings versus upfront costs. Purchasing points can substantially reduce your monthly payments, offering a clear benefit. However, borrowers should consider the breakeven point and future plans to avoid losses. The table below demonstrates how these factors play out financially.

Understanding when to buy mortgage points is crucial, as they aren't suitable for every situation. Knowing the optimal time to purchase points can lead to a better borrowing experience and help you maximize savings. Let's explore some scenarios to see when buying (or not buying) mortgage points is your best move.

Sarah, a 40-year-old teacher, plans to buy her dream home and live there indefinitely. With a stable job and a solid savings plan, Sarah is focused on long-term financial stability. She has found a charming house in a quiet neighborhood, perfect for her family.

Confident in her decision to stay in this home for the foreseeable future, Sarah is exploring ways to reduce her long-term mortgage costs. She is considering purchasing mortgage points to lower her interest rate and monthly payments, enhancing her financial comfort over the years.

Mark, a 35-year-old software engineer, aims to pay off his mortgage within 15 years. With a high income and disciplined saving habits, he prioritizes financial freedom and minimal debt. He recently bought a modern townhouse close to his workplace. Mark is committed to an aggressive repayment plan to become mortgage-free quickly. He is considering purchasing mortgage points to reduce his interest rate further, potentially accelerating his loan repayment.

Lisa, a 45-year-old marketing manager, has recently bought a suburban home. With a stable career and a preference for financial predictability, Lisa aims to maintain her current mortgage without refinancing.

She values consistency and has no plans to refinance in the near future. Lisa is considering purchasing mortgage points to secure a lower interest rate and stable monthly payments.

Jake, a 30-year-old graphic designer, is buying his first home with limited savings. Focused on managing his finances carefully, Jake is cautious about upfront expenses.

He has found a cozy apartment that fits his budget but doesn’t have much extra cash for additional costs. Jake is considering purchasing mortgage points to lower his interest rate but is concerned about the initial expense.

Emma, a 28-year-old freelance writer, has a fair credit score and is navigating the home-buying process. Aware of her credit limitations, she seeks ways to optimize her mortgage terms.

She has identified a quaint cottage that suits her needs but faces higher interest rates due to her credit score. Emma is considering purchasing mortgage points to reduce her interest rate and monthly payments.

In this scenario, the breakeven point is around 60.2 months. If you plan to stay in your home longer than five years, buying mortgage points will be financially beneficial.

When deciding between mortgage points and a larger down payment, several factors influence the better option. Making a 20% down payment may reduce your payments more effectively by eliminating private mortgage insurance (PMI).

Beyond the 20% threshold, investing in mortgage points often yields a better return. For instance, with a $400,000 loan, an $80,000 down payment at a 6.5% interest rate results in a monthly payment of approximately $2,023. Adding $4,000 to the down payment (making it $84,000) reduces the monthly payment to about $1,997, saving you $26 per month.

Alternatively, keeping the $80,000 down payment and purchasing mortgage discount points to lower the interest rate to 6.25%, which results in a monthly payment of around $1,970, saving $53 per month compared to the original rate. See your own payment estimates and annual percentage rates (APR) with a mortgage calculator.

Analyzing each scenario with your mortgage lender is essential, as a larger down payment might also secure a lower mortgage rate. Prioritizing a solid emergency fund and paying off high-interest debt should come before deciding on mortgage points or a bigger down payment. Always consult your lender and financial advisor to make the best choice for your situation.

Our FAQ section provides answers to typical questions about mortgage points, helping you understand their benefits and costs. Explore these to learn how mortgage points work and can impact your loan and monthly payments.