What Mortgage Points Are
A mortgage point (or discount point) is a fee paid at closing to cut your mortgage interest rate. One point equals 1% of the loan amount. Each point typically trims your rate by 0.25 percentage points, though the exact exchange rate varies by lender and moves with market conditions.
There is also a thing called origination points, which are fees lenders charge for processing the loan rather than for rate reduction. Always confirm whether points quoted in a loan estimate are discount points (rate reduction) or origination points (processing fee). They work differently and need to be judged separately.
Negative points (also called lender credits or rebate credits) are the opposite. The lender pays you points (as a credit toward closing costs) in exchange for a higher interest rate. If you plan to stay in the home a short time or have limited cash for closing, lender credits can cut upfront cost in trade for a slightly higher rate.
The Break-Even Calculation
The decision to buy points is at heart a time-value-of-money calculation. You pay more upfront to save money each month. The question is whether you will hold the home (and the mortgage) long enough for the monthly savings to add up past the upfront cost.
Example: You are taking out a $400,000 mortgage. The baseline rate without points is 7.0%, giving you a principal and interest payment of $2,661 a month. Pay two points ($8,000) and the rate drops to 6.5%, cutting your payment to $2,528 a month. A monthly savings of $133.
Break-even: $8,000 / $133 per month = 60 months (5 years). If you keep the home and the mortgage for more than 5 years, the points were worth buying. If you sell or refinance before 5 years, you would have been better off keeping the $8,000 and taking the higher rate.
When Buying Points Makes Sense
Points are most worth buying when you plan to stay in the home much longer than the break-even period, when you have cash on hand for closing that would otherwise sit in something paying a lower return than the rate buydown delivers, and when rates are elevated and you expect to keep the mortgage (rather than refinancing when rates fall).
At historically elevated rate levels, buying points to cut the rate on a home you plan to keep for 10 to 20 years can produce serious lifetime interest savings. On a 30-year mortgage, a 0.5 percentage point rate cut from 2 points saves roughly $48,000 in interest over the full term on a $400,000 loan.
When Skipping Points Makes More Sense
Points are less worth buying when you expect to refinance within a few years (the break-even never lands), when cash is tight and the point cost competes with down payment size or emergency fund, when you are unsure how long you will keep the home, or when the break-even period runs past 7 to 10 years.
Many buyers in high-rate environments prefer to take the market rate without points today and refinance when rates fall, paying points then if the new rate environment makes them worth it. That avoids sunk point costs from the original loan that go to waste after refinancing.
Asking for a Rate-Point Menu from Lenders
When comparing loan offers, ask each lender for a full rate-point menu: what rate is available at 0 points, 0.5 points, 1 point, and 2 points? And going the other way, what lender credit is available at 0.25%, 0.5%, and 0.75% above the par rate?
The menu approach gives you a clear view of the lender’s pricing structure and lets you pick the right trade for your situation and timeline, instead of accepting whatever combination the lender chooses to quote.