How Mortgage Points Work (And When to Buy Them)
Mortgage points sound complicated but the idea is pretty simple. You pay extra money upfront to lock in a lower interest rate for the entire life of your loan. Think of it like buying a discount in advance. The big question is whether that discount is actually worth it for your situation.
What Exactly Is a Mortgage Point?
One mortgage point equals 1% of your loan amount. On a $400,000 loan, one point costs $4,000. In exchange, your lender lowers your interest rate, usually by about 0.125% to 0.25%. That lower rate applies for the entire life of the loan.
You're getting a $400,000 mortgage at 7.00%. Your lender offers: pay $4,000 today (1 point) and your rate drops to 6.75%. That cuts your monthly payment by about $66. Doesn't sound huge, but over 30 years that's nearly $24,000 in savings. You paid $4,000 to save $24,000. That's a 6x return if you stay long enough.
The Break-Even Question
Here's the only real question you need to answer: how many months until you earn back what you paid for the points?
- Take the cost of the points ($4,000 in the example above)
- Divide by your monthly savings ($66)
- That gives you your break-even: about 61 months, just over 5 years
- Every month after that break-even point is pure savings in your pocket
Lender Credits: The Flip Side
You can flip this around too. Instead of paying points to lower your rate, you accept a slightly higher rate and the lender gives you cash back toward your closing costs. These are called lender credits, and they're great if you're short on cash at closing.
Option A: Pay $4,000 more today, save $66 a month. Option B: Pay $0 today, but your payment goes up $50 a month. Neither is wrong. It depends on how much cash you have at closing and how long you plan to stay. Short on cash? Lender credits can be a lifesaver without draining your savings.
When to Buy Points vs. Skip Them
- Buy points if: you plan to stay in the home longer than your break-even period and you have extra cash at closing
- Skip points if: you might move or refinance within 5 years, or you need that cash for your down payment or emergency fund
- Use lender credits if: you're tight on cash at closing and need help covering fees without a higher savings requirement
Use the Discount Points slider in the Mortgage tab to see exactly how each point changes your rate, monthly payment, and break-even timeline.