What Are Mortgage Points and How Do They Work?

Mortgage points are a common feature in home loans. However, many borrowers are unsure of how they work. In this article, we’ll explain what mortgage points are, how they affect your loan, and whether paying points upfront makes financial sense for your home purchase.

Also known as discount points, mortgage points are upfront fees you can choose to pay, typically prior to closing to lower the interest rate on your mortgage. Typically, one mortgage point equates to 1% of the amount you borrow. For example, if you’re borrowing $250,000, one point would typically cost you $2,500. However, this will vary, depending on your loan.

While discounts vary by lender, you can expect to shave about 0.25 percentage points off your interest rate for each mortgage point.¹

You can opt to buy multiple mortgage points or, in some cases, even fractions of a mortgage point. In most cases, you’ll pay for mortgage points up front, but some lenders will allow you to roll the cost into your mortgage.²

You may be able to save thousands of dollars on your mortgage through mortgage points. To determine your potential savings, you should calculate your breakeven point, which is when the cost of the points will equal your interest savings.³

Let’s say your points cost $5,000 and you save $77.00 on monthly mortgage payments. Divide the $5,000 by the $77.00 and you’ll get 65 months, which means it’ll take 65 months to recoup your initial investment.

In this case, mortgage points may be worth it, as long as you plan to stay in your home for longer than 65 months. If you have plans to move or refinance your home loan before then, you may be better off holding off.

The benefits and drawbacks of mortgage points include:⁴

Pros

• Lower interest rate: If you plan to keep your mortgage for a while, mortgage points can reduce your overall cost of borrowing. Depending on your interest rate, the size of your mortgage, and the number of mortgage points that you purchase, you may be able to save thousands of dollars over the course of your loan.
• Smaller monthly payments: A lower interest rate can lead to smaller monthly payments. This is a huge plus if you’d like more wiggle room in your monthly budget.
• Can make it easier to buy your dream home: With mortgage points, you may be able to make your dream home a bit more affordable.

Cons

• Higher closing costs: Since you’ll typically have to pay for mortgage points up front, they will raise your closing costs. You’ll have to come up with more money to close on your home.
• Not always worth it: In some cases, mortgage points may not pay off. If you only plan to stay in your home for a year or two, for example, their cost could exceed the savings they offer.
• May lead to a lower down payment: By buying mortgage points, you might not have as much money to use as a down payment on your home. A higher down payment may help you qualify for better loan terms, including a lower interest rate.