Mortgage Points Explained Simply: When Buying Down Your Rate Makes Sense

Mortgage points — sometimes called discount points — are an upfront fee you can pay to lower the interest rate on your home loan. The idea sounds straightforward, but whether buying points is a smart move depends on your budget, how long you plan to keep the loan, and the specific terms your lender offers. This guide explains points clearly, shows how to calculate break-even time, and gives practical rules of thumb to help you decide.

What are mortgage points?

A mortgage point is typically equal to 1% of your loan amount. Each point you buy reduces your interest rate by a set amount — commonly 0.25% per point on conventional loans, though the exact reduction varies by lender, loan program, and market conditions. Paying points is essentially paying prepaid interest in exchange for a lower recurring interest cost.

Types of points

There are two common ideas bundled into the word “points”:

• Discount points: Paid to lower your mortgage interest rate and monthly payment.
• Origination points (or fees): Charged by the lender for processing the loan; they do not lower your rate.

How buying points lowers your rate

When you pay money at closing to buy discount points, the lender reduces the rate on the loan. The exact rate reduction per point can vary — sometimes 0.125% to 0.5% per point depending on the lender and market. Because interest compounds over the life of the loan, a small change in rate can lead to sizable lifetime savings.

How to calculate cost and break-even

Two numbers matter: the upfront cost of points and the monthly savings you get from the lower rate. Break-even time tells you how long it takes for monthly savings to repay the upfront cost.

Step-by-step calculation

1) Cost of points = loan amount × points percentage (1 point = 1%).
2) Monthly savings = monthly payment at original rate − monthly payment at reduced rate.
3) Break-even months = cost of points ÷ monthly savings.
If break-even is shorter than how long you expect to keep the loan, points may make sense.

Example: $300,000 loan

Suppose a $300,000 fixed mortgage at 4.25% vs. buying one point (1% = $3,000) to reduce the rate to 4.00%. If the monthly payment (principal and interest) at 4.25% is $1,479 and at 4.00% is $1,432, monthly savings are $47. Break-even: $3,000 ÷ $47 ≈ 64 months (about 5.3 years). If you plan to stay in the home more than 5.3 years, you will likely recoup the cost and save money long-term.

Pros and cons of buying points

Pros

• Lower monthly payments immediately.
• Potentially large interest savings over the life of the loan.
• May be tax-deductible in some situations (consult a tax advisor).

Cons

• Requires significant cash at closing — funds you could otherwise use for down payment, emergency savings, or repairs.
• If you sell or refinance before break-even, you lose money on the points purchase.
• Not always the best use of funds if investment returns elsewhere are higher.

When buying points makes sense

Buy points if:

• You plan to keep the mortgage longer than the break-even period.
• You have extra cash after paying your down payment and reserves.
• You prefer a lower guaranteed monthly payment and predict low likelihood of relocating or refinancing soon.
• You are getting a good rate reduction per point based on market offers.

When not to buy points

Avoid buying points if you have limited cash, expect to move or refinance within a few years, or you can invest the money elsewhere with higher returns. Also be cautious if the lender’s rate reduction per point is weak — the math won’t favor you.

Financing points and tax considerations

Some lenders let you finance points into the loan: you pay less at closing but start the loan with a higher principal. Financing points reduces immediate cash needs but also lowers the benefit because you pay interest on the financed points. Regarding taxes, discount points are often treated as prepaid interest and may be deductible in the year paid if the loan meets IRS rules; otherwise they may be deductible over the loan’s life. Always check current rules with a tax professional.

Alternatives and negotiation

If points aren’t right for you, consider negotiating for lender credits (which raise your rate but lower closing costs), shopping lenders for better base rates, or exploring temporary buydown options (like a 3-2-1 buydown that lowers the rate for the first three years). Always compare the Loan Estimate from multiple lenders to see who offers the best overall value.

Buying mortgage points is a practical way to lower your interest rate, but it’s not a one-size-fits-all solution. Run the break-even math, consider how long you’ll keep the loan, and weigh alternative uses for your cash. When the numbers and your plans align, points can be a smart move toward lower monthly payments and long-term interest savings.