What Are Mortgage Points and Should You Pay Them?

How mortgage points work

A mortgage point, sometimes called a discount point, is a one-time purchase made at closing. Some companies refer to paying points as paying down the interest or a buydown. Essentially, you're buying your rate down with points.

Typically, each mortgage point costs 1% of your total home loan. So, one point on a $100,000 loan usually costs $1,000 upfront. Most lenders allow you to purchase a fraction of a point, too. Your lender sets the exact number, but each point paid will likely offer a reduction of 0.25% off your interest rate.

Paying down the interest increases your closing costs, but it also reduces your monthly mortgage payment.

“When you permanently buy down your mortgage interest rate, it’s a one-time fee paid at closing,” said ​​Adam Spigelman, senior vice president of portfolio retention with Planet Home Lending, a mortgage lender. “Traditionally, you, as the consumer, are paying it in additional closing costs or, in some cases, the seller pays for it.”

Should you buy mortgage points?

Buying mortgage points have become a more attractive option for buyers for a number of reasons.

“Rising interest rates, the probability of a recession and softening real estate markets have combined to make the use of mortgage points more attractive to homebuyers,” Spigelman said.

But should you buy them? A mortgage point purchase could be beneficial in a number of circumstances, including:

You expect to live in your home for a long time

The longer you plan to stay in your home, the more you’ll save from a lower interest rate, making the mortgage points worth it.

You don’t foresee refinancing

Refinancing means financing into a new loan, which means you lose the interest rate reduction from buying points with the original loan.

You’re making a large down payment

If you already have the 20% down payment needed to avoid private mortgage insurance (PMI) and can afford the additional mortgage points, then buying points may make sense.

» MORE: Mortgage points vs. down payments

When you shouldn’t buy mortgage points

There are some circumstances when buying mortgage points isn’t worth it, including:

You’re unsure if or when you’ll move

When deciding whether mortgage points are worth it, you need to consider the break-even point. This gives you a numbers-based answer for the minimum amount of time needed to recoup the upfront cost of the points. If you plan to sell the home before you break even, you’ll lose money on the points you bought.

You don’t have the funds for additional closing costs

Since you pay for mortgage points at closing, it increases the amount of money you must bring to the closing table. If fronting the additional funds will significantly strain your finances, it may not be worth it.

You want to eventually refinance

If it’s possible you’ll want to refinance to get a lower interest rate, decrease your monthly payment, get rid of PMI or take cash out, then you should avoid a points purchase. Refinancing before the break-even point means you won’t recoup the money you paid upfront for the points.

“If you refinance before the end of the mortgage, say in six months or six years, you lose the benefit of the lower rate purchased at closing,” Adam Spigelman said.

» RELATED: How soon can you refinance a mortgage?

Tips for negotiating mortgage points

Some lenders may be flexible with mortgage points, so it never hurts to ask for the best available deal during the negotiation process.

Here are some steps you can take as you’re comparing lenders:

• Shop around for lenders that offer the best rate reduction from mortgage points.
• Prequalify with multiple lenders and compare at least a few offers.
• Check for discounts associated with purchasing multiple points.
• Avoid lenders that have a low cap on the number of mortgage points that you can buy.
• Make a large down payment to keep your principal low.
• Avoid adjustable-rate mortgages (ARMs), as points may only reduce your interest rate during the ARM’s initial fixed-rate period.

No matter how many points you may or may not purchase, comparing lenders is essential to finding the best mortgage rate. Each lender has its own pricing structure, which means buying a mortgage point at one lender may not have the same impact on long-term interest charges as purchasing discount points from another lender.

FAQ

Bottom line

Whether or not you should buy mortgage points depends on your personal financial situation. If you plan on staying in your home for a significant amount of time and have the funds, buying mortgage points may make sense. However, if you’re struggling to meet closing costs or you anticipate refinancing or selling before your break-even point, mortgage points may not be worth it.