How Much Do Mortgage Points Cost?

What are mortgage points?

Mortgage points, also known as discount points or loan discounts, are points you can purchase from your lender at closing to improve your interest rate. This is a type of prepaid interest that homebuyers can use to get a new mortgage or refinance an existing one.

For each point you buy, the interest rate on your mortgage decreases, which also reduces your monthly mortgage payment. Because of this, the process is known as buying down the rate.

It is a financial strategy that can be especially ideal during periods of high interest rates.

How do mortgage points work?

During the closing process when buying a home, you can decide to buy mortgage points to get the best interest rate and lower your monthly payment. These points can be purchased upfront with your closing costs, or you can add them to your mortgage to be paid with your regular monthly mortgage payment.

If you have a fixed-rate mortgage, your mortgage points will lower your rate for the entire mortgage term. However, if you have an adjustable-rate mortgage (ARM), your mortgage points will only affect your initial rate and not the one for your variable term.

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How much can you save by buying mortgage points?

Mortgage points are part of the closing costs you pay for your new or refinanced mortgage. Each point costs 1% of your mortgage amount.

Discounts vary by lender, but generally, each point lowers your rate by 0.25%. This means you need to purchase four points to receive a 1% discount on your overall mortgage. Some lenders also allow you to purchase fractional points, adding even greater flexibility.

“A lender is happy to provide a lower rate, but since this gives away some of the base interest that a lender would earn over time, they will charge the borrower upfront for this shortfall,” explains Kevin Leibowitz, Founder of Grayton Mortgage.

Say you have a $300,000 mortgage, and you buy one discount point from your lender. In this case, you would pay $3,000 to receive a 0.25% interest rate discount.

Mortgage point example

However, your lender may limit the number of mortgage points you buy, with many lenders capping points at a total of four. This, in turn, limits how much you can lower your monthly payment.

Another consideration is whether your lender is offering a permanent or temporary rate buydown. If the buydown is just temporary, you will only receive a lower interest rate for a specified period before it reverts to the original rate.

Therefore, it is important to plan accordingly when calculating your closing costs.

Calculating your breakeven point

It is also important to consider your breakeven point. This shows you how long it will take to pay off the upfront costs of your mortgage points.

“Figuring the breakeven point is important in order to evaluate the effectiveness of the investment,” explains Walt Bianchi, MBA, owner of Bright Vision Mortgage.

Breakeven point calculation

Cost of points / Monthly savings = Breakeven point

It is important to calculate your breakeven point to determine if buying points is worth it. If you plan on moving, refinancing or selling your home in a few years, the upfront investment that mortgage points require may not make the most sense for you.

Pros and cons of mortgage points

There are several considerations to make when determining whether to buy mortgage points.

Pros of buying mortgage points

• Lower monthly payment: By buying mortgage points upfront, you reduce your monthly payment. This makes your mortgage more affordable, which helps leave room in the budget in case you have any financial emergencies or major life events.
• Less interest paid: Even more importantly, you save money on interest. By buying mortgage points, you pay less interest over the life of the loan, potentially saving yourself thousands of dollars.
• Lower debt-to-income ratio: By lowering your monthly payment, you also improve your debt-to-income ratio. This can improve your credit score and make it easier to receive approval for future loans.
• Potential tax deduction: When it comes time to file taxes, you may be able to claim a tax deduction for your mortgage points using Schedule A from Tax Form 1040. Be sure to consult a tax professional to see if you qualify.
• Occasional seller contribution: Sometimes, the seller will contribute to the cost of discount points in order to close a sale.

Cons of buying mortgage points

• Requires an investment: The additional expense of mortgage points may not be feasible for some homebuyers, especially since this comes at a time when many are already strapped for cash. It is often better to make a bigger down payment instead of reducing it to accommodate the purchase of mortgage points.
• Time-sensitive benefits: If you sell your home or refinance within a few years, you may not reap the benefits of any mortgage points you buy, thus losing money on your investment.
• Not ideal for fast pay-offs: If you plan to pay off your mortgage early, it may not make sense to purchase mortgage points. With this diminished timeline, you may not receive worthwhile savings to justify the upfront purchase of mortgage points.

Should you buy mortgage points?

When determining if mortgage points are worth it for your home mortgage, there are a few factors to consider.

First, calculate your down payment. It’s crucial to ensure you have enough for a sufficient down payment before allocating funds for mortgage points. If you have funds left over, then you can buy mortgage points, but be sure your down payment is taken care of first.

Here are some other questions you should ask yourself before buying mortgage points:

• What is the length of your mortgage?
• How long do you plan to own your home?
• If/when do you plan to refinance?
• What are your total and liquidity requirements?
• What are your overall closing costs?

Before closing, consult your mortgage lender, who can advise on whether buying points makes sense for your mortgage.

An expert’s perspective

“In almost all circumstances it makes little financial sense to buy points.”

“There are three exceptions when points make sense:

• When a borrower is being relocated by his or her company, and the relocation package includes points. In this case, it's free money and of course you take it.
• When a borrower's tax advisor recommends doing so for the purpose of gaining a deductible item to offset other gains on the borrower's tax return.
• When a borrower is just over the debt ratio limit and cannot get an approval on his loan. In this case it is sometimes possible to lower the rate by adding points so as to bring the borrower's debt ratio back under the limit and into the approvable range.”

Walt Bianchi, MBA
Owner of Bright Vision Mortgage

Discount points vs. origination points

Discount points are often confused with origination points, but the two are different concepts. Unlike discount points, which are optional, origination points are a standard part of your closing costs.

Also known as a mortgage origination fee, origination points are a fee you pay to your lender for processing, underwriting and originating your mortgage loan. Unlike discount points, origination points are a fee you pay that has no impact on your interest rate.

Origination points typically amount to 1% of your mortgage loan, but this can vary by lender. Some lenders, like Navy Federal Credit Union, do not charge any fees at all.