Are Mortgage Points Worth It?

Mortgage points allow you to pay cash at closing in exchange for a lower interest rate. Whether that's worth it depends on how long you plan to keep the loan.

It's a decision that comes up late, usually while you're already shopping for a mortgage and comparing offers. Here's how points work, how to run your break-even, and when paying for a lower rate actually pays off.

What are mortgage points?

There are technically two types of mortgage points: discount points and origination points. We'll primarily cover the discount points, but it's worth noting how both work.

Discount points

Discount points are a form of interest you pay up front instead of over time. You pay these points to a mortgage lender in exchange for a lower interest rate for the life of the loan. A single point typically costs 1% of the loan amount.

The rate reduction isn’t fixed: It’s often 0.25% per point but can depend on the lender, the loan type, and where market rates are generally. Ask what each point actually buys before you commit.

Origination points

Origination points are what the lender charges to process your application and underwrite your loan. Each point costs 1% of the loan amount, but they're generally listed as a flat fee on your loan estimate rather than as points.

Origination points aren't optional, but they can vary from lender to lender, so you can compare and potentially even negotiate lower fees.

Run the numbers >> Use Kikoff's amortization calculator to see total interest at each rate. Useful if you plan to keep the loan for its full term.

How much can mortgage points save you?

Mortgage discount points lower your interest rate and, in turn, your monthly payment. But your savings will ultimately depend on your loan terms and how many points you buy.

For example, let's say you're borrowing $400,000 on a 30-year fixed loan, and your interest rate is 6.5%. Here's how those savings play out:

In this scenario, one point would save you roughly $65 a month, and two points would increase that monthly savings to about $130. If you were to keep the loan for 10 years, one point would cut your payments by about $7,800 and $15,600, respectively.

‍Two kinds of "savings"

A lower payment and lower total cost aren't the same thing.
• Payment savings is what you keep monthly, times how long you hold the loan. That's what break-even math measures.
• Interest savings is what you avoid paying the lender over the full term, and on a 30-year loan it's usually much larger.

A lower rate also shifts more of each payment toward principal, so you build equity faster. That's a third benefit the monthly number doesn't capture.

How to calculate your break-even point

Your break-even point is the month when your savings added up month by month cover what you paid at closing for the discount points.

Calculate your break-even point in three steps:

1. Get two quotes from the same lender: Ask the lender to provide you with two loan estimates. One should include the interest rate and monthly payment with no points, and the other should include the rate and payment with the points you're considering.
2. Calculate the monthly savings: Subtract the payment with points attached from the payment with no points. In the example above, the difference between one and no points is $65.40.
3. Divide the cost of the points by the monthly savings: Using the example above, you would divide $4,000 by $65.40, giving you a result of 61.2.

This means that it would take roughly 61 months, or just over five years, to earn back what you paid upfront. If you expect to keep the mortgage longer than that, you'll end up saving more than you paid. But if you sell the home or refinance the loan before that, you'll lose money.

Read more >> How to Reduce Closing Costs When Buying a Home

When mortgage points are worth it

Because you can't always predict the future, figuring out whether mortgage points are worth it may require a little guesswork. They can make sense in situations that include:

• You're planning to stay in the home long term. If you plan to stay well past the break-even month, and you're not expecting a job relocation or a growing family to force a move, the chances of recouping your cost go up.
• You’ll have enough cash left after closing. Focus first on your down payment, as putting more down could secure you a lower interest rate on your own. But if you have enough for a sizable down payment, and you don't plan to drain your emergency fund, discount points could be worthwhile.
• A refinance is unlikely. If interest rates aren't expected to drop much before your break-even point, you might not need to go looking for better terms.
• You can get the seller to pay. Sellers and builders sometimes cover the cost as a concession. There’s no break-even for you, though it's money you could have taken off the price instead. Ask whether it's permanent points or a temporary buydown, which expires after a year or two and sends your payment back up.

When mortgage points aren't worth it

You can't get back the prepaid interest you pay at closing, so anything that shortens the life of the loan will work against you.

• You might move in the next few years. A starter home, a job that could relocate you, or a household that outgrows the place can each end the loan before you break even.
• You expect to refinance. If rates are high now or the rate you’re quoted comes from a thin credit file, refinancing later is a likely path. The cash you spent buying down the old rate doesn’t follow you to the new loan.
• You need the cash elsewhere. The thousands you pay to buy down your rate could go toward a higher down payment, an emergency fund, or repairs and replacements down the road.

Read more >> How To Lower Your Monthly Mortgage Payment

How your credit score affects your mortgage rate

Your credit score helps set your starting rate before points ever enter the picture. Lenders price mortgages in tiers, and a borrower with a strong score is quoted a lower rate than a borrower with a weak one.

That's because a lower score signals a higher chance of missed payments, so lenders charge more to cover that risk, often through a higher rate and added costs at closing. Your down payment, debt-to-income ratio (or how much of your monthly income already goes to debt payments), and loan type factor in alongside your score.

Bottom line

Points are worth thinking about, though only once you know the rate they're discounting. Buying down a rate you were quoted because of a thin credit file means paying cash to fix something credit could fix for free. And your score moves the rate before any points do.

If you're more than a few months out from applying, Kikoff’s Credit Account reports your on-time payments to all three credit bureaus, with no hard credit check and plans starting at $5 a month.