When shopping for a mortgage, you may come across the term “mortgage points.” While it may sound like credit card rewards or a game score, mortgage points are actually a powerful financial tool that can save (or cost) you thousands, depending on your situation.
In this post, we’ll discuss what mortgage points are, when buying them is a smart move, and when you’re better off skipping them.
What Are Mortgage Points?
Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate on your mortgage. This process is called “buying down the rate.”
- 1 point = 1% of your loan amount
- Each point typically lowers your interest rate by 0.25%, though this can vary
Example:
If you’re taking out a $300,000 loan, one point would cost $3,000. Paying that $3,000 might reduce your rate from 7% to 6.75%, depending on lender terms.
When Buying Points Makes Sense
Scenario 1: Long-Term Homeowner
Meet Sarah. She’s buying her forever home and plans to stay for 20 or more years.
- Loan: $300,000
- Interest rate without points: 7%
- Interest rate with 2 points: 6.5% (costing $6,000)
- Monthly savings: approximately $95
Break-even time: around 63 months (just over 5 years)
Since Sarah plans to stay long-term, she will pass the break-even point and continue saving money for many years.
Scenario 2: High Interest Rate Environment
If mortgage rates are historically high (such as 7 to 8 percent), buying points can significantly reduce your monthly payment and long-term interest costs.
Meet James. He is securing a 30-year fixed-rate mortgage at 7.5%, but can lower it to 7.0% by paying 2 points.
If James plans to keep the loan for over 6 or 7 years, the upfront cost could be well worth the long-term savings.
When Buying Points May Not Be Worth It
Scenario 3: Planning to Sell or Refinance Soon
Meet Lisa. She’s buying a condo but plans to sell in 3 years.
- Buying points would take more than 5 years to break even
Lisa should skip the points because she won’t live there long enough to recoup the upfront cost.
Scenario 4: Tight on Cash at Closing
Buying points can cost thousands. If you’re already stretching your budget to cover a down payment, closing costs, and moving expenses, adding points might strain your finances.
Meet Chris. He has just enough for his 10% down payment and standard fees.
It is better for Chris to keep extra cash for an emergency fund than to spend it on points.
How to Decide: The Break-Even Formula
Use this simple formula to estimate if mortgage points are worth it:
Break-even (in months) = Cost of points ÷ Monthly savings
If you will stay in the home longer than the break-even period, buying points can be a smart move.
Mortgage points are not one-size-fits-all. They can be a great way to save money if you plan to stay in your home long enough and have the cash available. If not, that money might be better spent elsewhere.
Before deciding, talk with your lender and run the numbers. Understanding your break-even point is key to making an informed decision.
Bay Area Homebuyer 
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