Mortgage Points Explained: Should You Buy Down Your Rate?

When you're shopping for a mortgage, you'll likely encounter the option to purchase "points" to reduce your interest rate. But what exactly are mortgage points, how do they work, and most importantly—are they worth the upfront cost?

This comprehensive guide will demystify mortgage points, help you calculate whether buying them makes financial sense, and show you how to make the smartest decision for your situation.

What Are Mortgage Points?

Mortgage points, also called discount points, are fees you pay directly to your lender at closing in exchange for a reduced interest rate on your loan. Think of it as prepaying interest to lower your monthly payment.

The Basic Math:

• 1 point = 1% of your loan amount
• Each point typically reduces your rate by approximately 0.25%
• Points are paid at closing as part of your [closing costs](/blog/homebuying-closing-process)

Example: On a $400,000 mortgage:

• 1 point costs $4,000
• 2 points cost $8,000
• 3 points cost $12,000

Types of Mortgage Points

There are actually two types of points in the mortgage world, and it's important to understand the difference:

1. Discount Points (The Focus of This Article)

These are optional fees you choose to pay to lower your interest rate. They're a form of prepaid interest that reduces your ongoing monthly payment.

Key Characteristics:

• Completely optional
• You choose how many to buy (0, 1, 2, 3, or fractional amounts like 1.5)
• Generally tax-deductible in the year you buy your home
• Provide permanent rate reduction for the life of your loan

2. Origination Points (Lender Fees)

These are fees charged by the lender to cover their costs of processing and underwriting your loan. They don't reduce your interest rate.

Key Characteristics:

• Sometimes negotiable
• Pure lender profit/costs
• No interest rate reduction
• May or may not be tax-deductible

Important: When a lender quotes you points, always clarify whether they're discount points or origination points. This guide focuses on discount points.

How Discount Points Work

When you buy discount points, you're essentially making a trade-off: pay more money now to save money every month for the life of your loan.

The Mechanics:

1. Base Rate: Lender offers you a rate (e.g., 6.50% with 0 points)
2. Point Purchase: You choose to buy 2 points for $8,000 on a $400,000 loan
3. Reduced Rate: Your rate drops to 6.00% (0.25% per point)
4. Monthly Savings: Lower rate = lower monthly payment
5. Long-term Savings: Monthly savings compound over years

Real Example:

$400,000 loan, 30-year fixed mortgage

Option A: No Points

• Interest rate: 6.50%
• Monthly payment: $2,528
• Upfront cost: $0
• Total interest over 30 years: $509,960

Option B: Buy 2 Points

• Interest rate: 6.00%
• Monthly payment: $2,398
• Upfront cost: $8,000
• Total interest over 30 years: $463,280
• Monthly savings: $130
• Total interest savings: $46,680
• Net savings after points: $38,680

Calculating Your Break-Even Point

The break-even point is how long it takes for your monthly savings to equal the upfront cost of the points. After this point, you're saving money every month.

Simple Formula: Break-even months = Cost of points ÷ Monthly savings

Using Our Example:

• Cost of 2 points: $8,000
• Monthly savings: $130
• Break-even: $8,000 ÷ $130 = 61.5 months (about 5 years)

What This Means: If you plan to keep the mortgage for more than 5 years, buying the points saves you money. If you sell or refinance before 5 years, you lose money.

When Buying Points Makes Sense

Mortgage points aren't right for everyone. Here are scenarios where they typically make good financial sense:

✅ You Should Consider Buying Points If:

1. You Plan to Stay Long-Term

• Staying in the home 7+ years: Definitely consider points
• Staying 5-7 years: Points likely make sense
• Staying 3-5 years: Calculate carefully
• Staying under 3 years: Usually not worth it

2. You Have Extra Cash Available

• You've already made a 20% down payment
• You have 6+ months emergency fund saved
• The money for points isn't needed elsewhere
• You're not depleting your entire savings

3. You're in a High Tax Bracket

• Points are typically tax-deductible in the year of purchase
• Higher tax bracket = bigger deduction benefit
• Consult your tax advisor for specific impact

4. Interest Rates Are High

• When base rates are 6% or higher, buying them down provides more value
• In low-rate environments (3-4%), the savings are smaller

5. You Want to Lower DTI for Qualification

• Buying points lowers your monthly payment
• Lower payment = lower [debt-to-income ratio](/blog/dti-ratio-explained)
• Can help you qualify for the loan or a larger loan amount

6. You Prefer Predictable Long-Term Savings

• You value the certainty of lower monthly payments
• You're not planning to refinance
• You're risk-averse and want guaranteed savings

❌ You Should Avoid Buying Points If:

1. You Might Move or Refinance Soon

• Military members expecting reassignment
• Job frequently requires relocation
• Starter home you'll outgrow in 3-5 years
• Expecting to refinance when rates drop

2. Cash Is Tight

• Better to use that money for a larger down payment ([avoid PMI](/blog/mortgage-insurance-pmi-guide))
• Need to maintain emergency fund
• Have other high-interest debt to pay off
• Stretching to afford the home already

3. You Have Better Investment Opportunities

• Stock market historically returns 10% annually
• Paying off [credit card debt](/blog/heloc-vs-credit-card) (15-25% interest)
• Other high-ROI opportunities

4. The Break-Even Is Too Long

• If break-even exceeds 7-8 years, probably not worth it
• Too much uncertainty over that timeframe

5. Interest Rates Are Expected to Drop

• If rates might fall 1% or more in next 1-2 years
• Better to wait and refinance at a lower rate
• Points only pay off if you keep that rate long-term

How Much Do Points Actually Cost?

Points cost 1% of your loan amount per point, but the value of each point varies based on several factors.

Cost Examples Across Loan Sizes:

Rate Reduction Variations:

Not all points are created equal. The rate reduction per point varies by:

1. Lender: Some lenders offer 0.20% per point, others 0.30%
2. Market conditions: Rate reduction value fluctuates
3. Loan type: FHA, VA, and conventional loans have different point values
4. Your credit profile: Higher credit scores may get more value per point

Always ask your lender: "Exactly how much will each point reduce my rate?"

Fractional Points: You Don't Have to Buy Whole Numbers

Many borrowers don't realize you can buy fractional points like 0.5, 1.25, or 1.75 points.

Example Scenarios:

Scenario 1: Fine-Tune Your Payment

• Target monthly payment: $2,450
• 0 points gets you $2,528/month (too high)
• 2 points gets you $2,398/month (more than needed)
• 1.5 points gets you $2,463/month (just right) and costs $2,000 less

Scenario 2: Use Leftover Cash

• You have $5,500 available for points
• 1 point = $4,000
• 2 points = $8,000 (too much)
• Buy 1.375 points for exactly $5,500

Flexibility: Most lenders allow you to buy points in 0.125 increments.

Tax Implications of Mortgage Points

Discount points are generally tax-deductible, but the rules are specific.

Primary Residence Purchase:

• Points typically fully deductible in year of purchase
• Must be common practice in your area
• Must be calculated as percentage of loan amount
• Cannot exceed what's typical in your market (usually 0-3 points)

Refinance:

• Points must be deducted over the life of the loan
• If you refinance a $400,000 loan for 30 years and pay $8,000 in points, you deduct $266.67 per year ($8,000 ÷ 30 years)

Second Home or Investment Property:

• Must be deducted over life of loan
• Cannot deduct in year of purchase

Important: Tax laws change. Consult with a tax professional about your specific situation. The Tax Cuts and Jobs Act of 2017 changed many deductions, though mortgage points remain generally deductible.

Points vs. Larger Down Payment: Which Is Better?

If you have extra cash, should you buy points or make a larger down payment? Here's the comparison:

Larger Down Payment Advantages:

• Reduces loan amount (saves on all interest, not just rate reduction)
• May [eliminate PMI](/blog/mortgage-pmi-removal-guide) (required on loans under 20% down)
• Builds equity immediately
• Lowers monthly payment
• Improves loan-to-value ratio

Mortgage Points Advantages:

• Keeps more cash liquid
• May provide better ROI if you're already at 20% down
• Tax-deductible in year of purchase (primary residence)
• Easier to calculate exact savings

The Math:

$400,000 home purchase, you have $90,000 available

Option A: $80,000 down (20%) + $8,000 in points (2 points)

• Loan amount: $320,000
• Rate: 6.00% (bought down from 6.50%)
• Monthly payment: $1,919
• No PMI

Option B: $90,000 down (22.5%) + $0 in points

• Loan amount: $310,000
• Rate: 6.50%
• Monthly payment: $1,959
• No PMI

Result: Option A provides slightly lower monthly payment ($40/month savings) for same cash outlay. However, Option B has less total loan amount.

General Rule: If you're under 20% down, prioritize getting to 20% to eliminate PMI before buying points.

How to Negotiate Points with Lenders

Points are often negotiable. Here's how to get the best deal:

1. Compare Lenders Thoroughly

• Get quotes from 5-7 lenders
• Ask each: "What's your rate with 0 points, 1 point, and 2 points?"
• Compare the rate reduction per point across lenders

2. Understand Point Value Variations

• Some lenders offer 0.25% per point
• Others might offer 0.30% or only 0.20%
• Higher value per point = better deal

3. Ask About Lender Credits

• Some lenders offer "negative points" or lender credits
• You accept a slightly higher rate in exchange for the lender covering some closing costs
• Good option if cash is tight

4. Negotiate Total Cost

• Ask: "Can you reduce the cost per point from 1% to 0.875%?"
• Or: "Can you increase the rate reduction to 0.30% per point instead of 0.25%?"

5. Bundle for Discounts

• Having accounts with the bank may reduce point costs
• First-time homebuyer programs sometimes offer discounted points
• Ask about any available promotions

Real-World Examples: Should They Buy Points?

Example 1: The Long-Term Family Home

Sarah and Mike's Situation:

• Buying: $450,000 home
• Loan: $360,000 (20% down)
• Plan: Forever home, staying 15+ years
• Extra cash: $15,000 available after down payment and emergency fund

Analysis:

• Buy 2 points for $7,200
• Rate: 6.50% → 6.00%
• Monthly savings: $117
• Break-even: 61 months (5 years)
• Staying 15+ years: Will save approximately $13,860 net

Recommendation: ✅ Buy the points. Long timeline makes this an easy yes.

---

Example 2: The Starter Home

Jessica's Situation:

• Buying: $280,000 townhouse
• Loan: $252,000 (10% down)
• Plan: Starter home, will upgrade in 4-5 years when starting a family
• Extra cash: $8,000 available

Analysis:

• Buy 2 points for $5,040
• Rate: 6.75% → 6.25%
• Monthly savings: $80
• Break-even: 63 months (5.25 years)
• Likely selling before break-even point

Recommendation: ❌ Don't buy points. Better to keep cash for future down payment or use it to get to 20% down (eliminate PMI).

---

Example 3: The Military Family

Captain Johnson's Situation:

• Buying: $380,000 home
• Loan: $304,000 (20% down)
• Plan: Military, typically move every 3-4 years
• Extra cash: $12,000 available
• Eligible for VA loan

Analysis:

• VA loan offers very competitive rates already (6.00%)
• Buy 1 point for $3,040
• Rate: 6.00% → 5.75%
• Monthly savings: $47
• Break-even: 65 months (5.4 years)
• High probability of moving before break-even

Recommendation: ❌ Don't buy points. Military lifestyle means frequent moves. Save the cash for next PCS.

---

Example 4: The High Earner

David's Situation:

• Buying: $800,000 home
• Loan: $640,000 (20% down)
• Plan: Dream home, staying 20+ years
• Extra cash: $50,000 available after all costs
• Tax bracket: 35% federal

Analysis:

• Buy 2 points for $12,800
• Rate: 6.50% → 6.00%
• Monthly savings: $205
• Break-even: 62 months (5.2 years)
• Tax deduction worth approximately $4,480 first year
• Effective break-even after tax benefit: 41 months (3.4 years)

Recommendation: ✅ Buy the points. Long timeline, high tax bracket, significant monthly savings all favor buying points.

Frequently Asked Questions

Q: Can I buy points on a refinance?

A: Yes, but the tax treatment is different. Points on a refinance must be deducted over the life of the loan rather than all at once. The break-even calculation remains the same.

Q: What happens to my points if I refinance early?

A: You lose the benefit. If you paid $8,000 in points but refinance after 3 years with a 5-year break-even, you're out $8,000 minus whatever monthly savings you accumulated.

Q: Can the seller pay for my points?

A: Yes! Seller-paid points (called [seller concessions](/blog/seller-concessions-guide)) are common, especially in buyer's markets. The seller pays the points cost at closing, you get the lower rate. This is a great negotiating tactic.

Q: Are points required on any loans?

A: No, points are always optional. Never let a lender tell you they're required. If they're charging origination points (fees), shop other lenders.

Q: How many points can I buy?

A: Typically 0-3 points, though some lenders allow more. Beyond 3 points, the rate reduction usually diminishes (diminishing returns).

Q: Do points affect my APR?

A: Yes. The Annual Percentage Rate (APR) includes points in the calculation, which is why APR is always higher than your interest rate when you buy points.

Q: Can I roll points into my loan amount?

A: Technically yes, but this defeats the purpose. You'd be paying interest on the points for 30 years, completely negating any savings.

Q: What if I pay off my loan early?

A: Points only make sense if you keep the loan past the break-even point. If you plan to pay off early, calculate your break-even based on your planned payoff timeline.

Q: Are "negative points" or lender credits worth it?

A: Sometimes. If you're cash-strapped, accepting a 0.25% higher rate in exchange for $4,000 in closing cost credits can make sense. You can always refinance later when you have more cash.

Quick Decision Framework

Use this flowchart to decide whether to buy points:

1. Are you making at least 20% down payment?

   • No → Use extra cash for larger down payment first
   • Yes → Proceed to #2

2. Do you plan to keep this mortgage for 5+ years?

   • No → Don't buy points
   • Yes → Proceed to #3

3. Do you have extra cash after down payment and 6-month emergency fund?

   • No → Don't buy points
   • Yes → Proceed to #4

4. Is the break-even point under 7 years?

   • No → Don't buy points
   • Yes → Proceed to #5

5. Could you earn a better return investing that money elsewhere?

   • Yes (confident in better returns) → Don't buy points
   • No or unsure → Buy the points!

The Bottom Line

Mortgage points can be a powerful tool to reduce your long-term borrowing costs, but they're not right for everyone. The key factors are:

• Timeline: Staying 7+ years = strong case for points
• Cash availability: Only buy points with extra cash, never at expense of down payment or emergency fund
• Break-even analysis: Calculate your specific numbers
• Tax situation: Higher tax brackets benefit more
• Market conditions: Points provide more value when rates are high

Remember: Every 0.25% reduction in rate saves approximately $52 per month on a $400,000 loan. Over 30 years, that's $18,700. Whether paying $4,000 upfront for that savings makes sense depends entirely on your situation.

Ready to Find Your Best Mortgage Rate?

Understanding points is just one piece of the mortgage puzzle. The team at HonestCasa can help you compare lenders, calculate break-even points for your specific situation, and find the best overall mortgage package.

We'll shop multiple lenders on your behalf, negotiate rates, and help you decide whether buying points makes sense for your unique circumstances. Our service is completely free—we're paid by lenders, never by you.

Get started today and let us find you the lowest rate with or without points. Your financial future is too important to leave to guesswork.

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