See how mortgage discount points can be used to lower interest costs over the life of a home loan. 

When someone says they’re going to “buy down the rate” on a home loan, they’re talking about mortgage points. Buying points when financing or refinancing a mortgage is a way to reduce interest costs over the life of the loan. Here’s a look at how mortgage points work and when it makes sense to buy them.

What are mortgage points?

Mortgage points are upfront fees a homebuyer pays at closing to get a lower interest rate on their home loan. They may also be called discount points or mortgage discount points.

For tax purposes, points are considered mortgage interest, and this is why they are sometimes called prepaid interest.

How do mortgage points work?

Mortgage points let buyers lower their loan’s interest rate by paying upfront.

 

• 1 point = 1% of the loan amount

• Each point typically reduces the interest rate by 0.25%

• Buyers can purchase multiple points

Example:

• Loan amount: $200,000

• Buying 1 point costs $2,000 and lowers the rate from 6.75% to 6.5%

• Buying 2 points costs $4,000 and lowers the rate to 6.25%

Payment Options:

• Points are usually paid in cash at closing

• Some buyers roll points into their mortgage

• Sellers may agree to cover some or all points

How much money can you save with mortgage points?

Lowering the interest rate on a mortgage with points has long- and short-term benefits.

In the long-term, discount points reduce the overall interest a homeowners pays.

In the short-term, monthly payments are reduced.

Let’s compare how one point paid in cash affects interest on a 30-year, $200,000 loan at 6.5%:

Interest Rate	Total Interest (life of loan)	Monthly Payment
6.5%	$255,085.82	$1,264.14
6.25%	$243,319.12	$1,231.43

In this scenario, buying one point saves the homeowner $32.71 each month and $392.52 annually. Over the life of the loan, they save $11,766.70 on interest.

 To run numbers for your specific situation, use our mortgage calculator.

How do I buy mortgage points?

The option to buy mortgage points takes place at closing, and can be done through your mortgage lender.

• Talk to your lender. Ask how many points you can buy and how much each will reduce your interest rate.
• Review the cost.
  • 1 point = 1% of your loan amount
  • Example: On a $250,000 loan, 1 point costs $2,500
• Decide how many points to buy. Consider your budget and how long you plan to stay in the home—points pay off more over time.
• Include points in your loan estimate. Your lender will show point costs and rate reductions in your official loan estimate.
• Pay at closing. Points are typically paid in cash when the loan closes, though some buyers roll them into the mortgage or negotiate with sellers to cover them.

When is it worth buying mortgage points?

Buying points can save you money—but only under the right circumstances.

It’s usually worth it when:

• You plan to stay in the home long-term. The longer you keep the mortgage, the more time you have to benefit from the lower interest rate.

• You have extra cash at closing. Paying for points upfront requires available funds beyond your down payment and closing costs.

• You want lower monthly payments. Points reduce your interest rate, which can lead to significant monthly savings.

• You’re locking in a fixed-rate mortgage. Points are most beneficial when your rate won’t change over time.

It may not be worth it if:

• You plan to sell or refinance within a few years

• You need the cash for other expenses or emergencies

• You’re getting a loan with a very low starting rate

Are mortgage points optional?

Buying points is always up to the homebuyer. They’re a valuable way to reduce long-term home loan costs but they’re not the only way. Some homeowners decide to apply money they might have used for points to their downpayment to reduce their loan principal.

Another way to save is to pay extra principal each month to pay off the loan faster. Many people like this option because they can decide each month if they want to pay additional principal or use their money another way.

If a seller offers to pay for one or more points, that’s a definite bonus for the buyer because they get lower interest without an additional cash outlay.

Should I buy points on my mortgage?

When it comes to deciding if mortgage points are the right choice for your home loan, you don’t have to do it alone. Our friendly and experienced mortgage loan officers can help you figure it out.

 

All loans are subject to approval. Rates, terms and condition are subject to change and may vary based on credit worthiness, qualifications and collateral conditions.