Simple definition
Points, sometimes called discount points, are prepaid interest you pay the lender at closing to buy down your mortgage rate. Each point costs one percent of the loan amount and typically shaves a small amount off your interest rate. It's a trade: more cash now for a lower monthly payment later. Points make sense only if you keep the loan long enough to save back what you paid — the break-even point.
Why it matters
Points can lower your rate and monthly payment for the life of the loan, but only pay off if you stay long enough to recoup the upfront cost. If you sell or refinance before breaking even, you lose money. Running the math protects you from overpaying at closing.
Real-life example
On a $200,000 loan, one point costs $2,000 and lowers your payment by about $60 a month. Dividing $2,000 by $60 gives roughly 33 months to break even. Keep the loan past that and you save; sell or refinance sooner and the points cost you.
Formula
Break-even months = Cost of points ÷ Monthly payment savings
Common mistakes
- Paying points without calculating the break-even, then selling before you recoup it.
- Buying points with cash you need for the down payment or emergency fund.
- Assuming points always lower the rate by a fixed amount — it varies by lender.
- Confusing discount points with origination fees, which don't reduce your rate.
Pro tips
- Calculate your break-even month and compare it to how long you'll keep the loan.
- Skip points if you might move or refinance within a few years.
- Ask the lender for the exact rate reduction each point buys before deciding.
- Remember mortgage points may be tax-deductible — check current IRS rules.
Related Money Dictionary terms
- Interest RateThe percentage a lender charges you to borrow money, or pays you to keep money deposited, over a set period.
- Closing CostsThe fees paid to finalize a home purchase, covering things like appraisal, title work, and loan processing.
- MortgageA long-term loan used to buy a home, secured by the property itself, which the lender can foreclose on if you stop paying.
- Annual Percentage Rate (APR)The full yearly cost of a loan, including the interest rate plus lender fees, giving a truer picture than the rate alone.
- RefinancingReplacing an existing loan with a new one, usually to get a lower rate, a different term, or a smaller monthly payment.
Frequently asked questions
Are mortgage points worth paying?
It depends on how long you keep the loan. Divide the cost of the points by the monthly savings to find your break-even month. If you'll own the home and keep the mortgage well past that point, you come out ahead. If you'll sell or refinance sooner, points cost you money.
How much does one point lower my rate?
It varies by lender and market, but one point often reduces the rate by roughly a quarter of a percentage point — the exact amount isn't fixed. Ask each lender to show the specific rate for zero, one, and two points so you can compare the true cost and benefit before committing.
Are discount points the same as origination fees?
No. Discount points are optional prepaid interest that lower your rate. Origination fees are what the lender charges to process the loan and don't reduce your rate. Both appear at closing and are sometimes labeled as 'points,' so read your Loan Estimate carefully to see which is which.
Knowing what Points means is knowledge — the first half. A brick gets placed when you act on it: calculate your break-even month before agreeing to pay any mortgage points.
Sources & references
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Plain-English education — not personalized legal, tax, or investment advice.