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 (also called discount 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?

The value of a point is equal to 1% of the home loan. In return for paying a point, a homebuyer gets a 0.25% cut on their loan’s interest rate. Homebuyers can buy more than one point.

Here’s an example of how it works with a hypothetical homebuyer who chooses to buy one point for a $200,000 mortgage. The point costs $2,000 and reduces a 6.75% interest rate to 6.5%. If this buyer bought two points, the total point cost would be $4,000 and bring the home loan’s interest rate down to 6.25%

Points are typically paid for in cash when the home sale closes but not always. Some home buyers roll points into their mortgage loans and some sellers agree to pay for one or more points.

How much money do points save?

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.

When mortgage discount points make sense

Buying mortgage points is most beneficial for folks who plan on staying in their home a long time. In the example above, the homeowner would benefit from buying one point in cash if they stayed just over five years. Here’s the math:

            Point cost ÷ Monthly Savings = Number of months to break even

Number of months to break even ÷ 12 = Number of years to break even

When we plug in the numbers, it looks like this:

$2,000 ÷ $32.71 = 61.14 months

61.14 ÷ 12 = 5.1 years

Homebuyers who plan to move before the breakeven point would be better off putting additional funds toward their down payment.

When calculating breakeven points, remember results will vary based on mortgage amount, interest rate and the number of points purchased. If points are rolled into the mortgage principal, the breakeven formula above doesn’t apply.

Also, because mortgage points are considered mortgage interest, buying points may be deductible and result in tax savings.

Mortgage points are always 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.

Get help making your decision

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.