Mortgage Points & Buying Down Your Rate
What it is
Discount points are an optional up-front fee you can pay a lender to lower your interest rate — often called “buying down” the rate. Each point costs roughly 1% of your loan amount and reduces your rate by a set amount (the exact reduction varies by lender and market conditions). Paying points is a trade: more cash at closing now, in exchange for a lower payment over time.
Are discount points worth it?
One point costs 1% of your loan and lowers your rate a little. Break-even is the up-front cost divided by the monthly saving — points tend to pay off only if you keep the loan past that point. This is educational, not a recommendation.
How it works
- One point = about 1% of the loan. On a hypothetical $300,000 loan, one point would cost roughly $3,000.
- Each point typically shaves a fraction of a percentage point off your rate. The reduction isn’t fixed by law — it depends on the lender’s rate sheet.
- Because points are a financing fee, they’re reflected in your loan’s APR.
- Points are optional. You can also take a higher rate in exchange for a lender credit that reduces closing costs — the reverse trade.
The break-even idea
The key question is: how long until the monthly savings pay back the up-front cost of the points? That’s your break-even point.
Suppose one point costs $3,000 and lowers your monthly payment by $50. Divide the cost by the monthly savings: $3,000 ÷ $50 = 60 months, or 5 years. If you expect to keep the loan longer than 5 years, the points would save you money overall in this example. If you’d likely sell or refinance sooner, you’d probably not recover the cost.
How to think about it
- Time horizon is everything. Points favor those who keep the loan well past the break-even point.
- Consider the alternative uses of that cash. Money spent on points isn’t available for a larger down payment, reserves, or other goals.
- Compare offers consistently. When shopping lenders, make sure you’re comparing quotes with the same number of points, or use APR to normalize.
Points let you pay cash up front to buy down your rate; whether that’s worthwhile hinges on the break-even math — up-front cost divided by monthly savings — against how long you realistically expect to keep the loan. Running your own numbers (House.ai’s points calculator can help) shows the break-even for your specific quote.