Mortgage Points (Discount Points) Explained: Should You Pay to Lower Your Rate?
- Isaac Robles
- Sep 4
- 3 min read
When you’re comparing mortgage offers, you’ll likely come across the term “points”, “discount points”, or "buying down your rate". It might sound like confusing lender jargon, but understanding it can save (or cost) you thousands of dollars over the life of your loan. Simply put, mortgage points are an upfront fee you pay at closing in exchange for a lower interest rate. The question is: when does it make sense to pay for them?
This guide breaks down what mortgage points are, how they work, and how to decide if they’re worth it for your situation.
What Are Mortgage Points?
Mortgage points (also called discount points) are fees you pay directly to your lender to reduce your mortgage interest rate.
One point typically equals 1% of your total loan amount.
Example: On a $300,000 loan, 1 point = $3,000.
Each "point" usually lowers your interest rate by about 0.25%, though this can vary by lender and market conditions.
Think of mortgage points like buying a membership at a warehouse store, like Costco. You pay a fee upfront, and in return you get discounted prices every time you shop. With points, you pay at closing, and your “discount” is a lower interest rate that saves you money month after month.
How Do Mortgage Points Work?
Think of mortgage points as prepaying some of your loan’s interest upfront. By paying this fee at closing, you lock in a lower interest rate for the life of the loan.
Example:
Loan: $300,000, 30-year fixed.
Without points: 6.5% interest, monthly payment ≈ $1,896.
With 1 point ($3,000): 6.25% interest, monthly payment ≈ $1,847.
Monthly savings: $49.
At $49/month, it would take about 61 months (just over 5 years) to break even on the upfront cost.
When Are Mortgage Points Worth It?
Mortgage points are a smart choice if:
You plan to keep the home long enough to reach the break-even point.
You want to reduce your monthly payment for long-term affordability.
You believe interest rates will stay the same or rise.
They might not be worth it if you plan to sell or refinance within a few years, since you may not recoup the upfront cost.
Pros and Cons of Paying Points
Pros | Cons |
Lowers your interest rate | Increases upfront costs |
Reduces monthly payment | Break-even takes time (often years) |
Can save thousands over 30 years | Not ideal if moving/refinancing soon |
Potential tax deduction (consult a tax pro) | Uses cash you might need for other expenses |
Key Points Summary
Key Question | Key Takeaway |
What Are Mortgage Points? | Upfront fees paid at closing to lower your mortgage interest rate |
How Do They Work? | 1 point = 1% of loan amount, usually lowers rate by ~0.25% |
When Are They Worth It? | Best if you’ll keep the loan long enough to reach break-even (you want lower monthly payments) |
When Are They Not Worth It? | If you plan to move or refinance before reaching break-even or need cash for other expenses |
Mortgage Points Explained: Final Thoughts
Mortgage points (discount points) give buyers flexibility: pay more upfront to save over the long haul.
The key is knowing your timeline and running the numbers to see if the savings outweigh the cost.
Always ask your lender for a side-by-side comparison, with and without points, so you can calculate the break-even point.
As Wisconsin’s housing expert, I can help you evaluate mortgage offers, explain the impact of points, and connect you with trusted lenders to secure the best deal for your future home. Reach out so I can get you started on your home buying journey, confidently!
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