Mortgage Points Explained: When to Buy Down Your Rate

What Are Mortgage Points?

Mortgage discount points are prepaid interest you pay at closing to reduce your interest rate. One point costs 1% of the loan amount and typically lowers your rate by about 0.25%. On a $350,000 loan, one point costs $3,500 and might reduce your rate from 7.0% to 6.75%.

The Break-Even Calculation

To determine if points are worth buying:

• Calculate the monthly payment savings from the lower rate
• Divide the cost of points by the monthly savings
• The result is how many months to break even

Example: $3,500 in points saves $60/month. Break-even = $3,500 / $60 = 58 months (about 5 years). If you keep the loan longer than 5 years, points save you money.

When Points Make Sense

Buy points when you plan to keep the loan 5+ years and you have extra cash beyond your down payment and emergency fund. Points are also attractive in higher-rate environments where you do not expect to refinance soon.

When to Skip Points

Skip points if you might sell or refinance within 5 years, if the money would be better used as a larger down payment (to avoid PMI), or if you need to keep cash reserves. In a declining rate environment, you may refinance before reaching break-even.

Negative Points (Lender Credits)

You can also take a higher rate in exchange for lender credits toward closing costs. This is the opposite of buying points and makes sense if you plan to refinance or sell relatively quickly.