What Are Mortgage Points?
Mortgage points (discount points) are an upfront fee paid at closing to reduce your interest rate. One point equals 1% of the loan amount. In exchange, the lender reduces your interest rate -- typically by 0.25 percentage points per point purchased, though the actual reduction varies by lender and market conditions.
The Break-Even Calculation
The break-even point is the number of months it takes for the accumulated monthly interest savings to equal the upfront cost of the points. If your break-even is 48 months and you plan to stay in the home for 10 years, buying points is likely worthwhile. If you plan to move or refinance within 3 years, you will not recoup the cost.
When Buying Points Makes Sense
Points make the most financial sense when: you have the cash to pay them upfront without depleting reserves, you plan to stay in the home longer than the break-even period, and the rate reduction meaningfully reduces your payment on a large loan balance.
Points vs. Larger Down Payment
If choosing between buying points and making a larger down payment, the larger down payment is often the better choice. It reduces the loan principal (and all future interest), may eliminate PMI, and improves your LTV ratio. Points only reduce the rate.