Some homebuyers pay mortgage points to lower their interest rate and save over the life of their loan. See if this strategy might make sense for you.

  • Mortgage points allow you to buy down your mortgage interest rate by paying fees up front.
  • This lower interest rate may reduce your monthly mortgage payment, and could potentially save you money in the long term by reducing your overall interest expense.
  • Before purchasing mortgage points, it’s important to calculate the breakeven point by dividing the upfront cost of the points by the monthly savings from the lower rate. This will tell you how many month you need to retain the mortgage (not sell the house or refinance) to benefit from buying mortgage points.

Mortgage points (also called mortgage discount points) are upfront fees paid to a lender to lower the interest rate for the term of the home loan. Paying mortgage points is commonly referred to as “buying down the rate.”

Lowering the interest rate can help borrowers save money by reducing their total interest expense over time. It can also make an immediate difference for borrowers by lowering the monthly mortgage payment, which includes interest due.

Not only does a lower payment give you more room in your budget, but it also improves your debt-to-income ratio (DTI), which may improve your chances of qualifying for a loan.

In this article, you’ll learn the answers to important mortgage point questions like:

  • What are mortgage points?
  • How do mortgage points work?
  • What is the disadvantage of points on a mortgage?
  • Is it worth it to pay points on a mortgage?

How Do Mortgage Points Work?

When you pay a mortgage point, your interest rate is adjusted down by a predetermined percentage. The cost of one mortgage point is equal to 1% of your requested mortgage loan amount.[1] So, if you are borrowing $320,000 to buy a $400,000 home, each mortgage point would cost $3,200.

Each lender can set its own terms for the amount by which a mortgage point reduces your interest rate. Many lenders set this rate reduction at around .25%.[2]

So, if you are offered a loan with a 6.5% interest rate, for example, you might be able to pay a mortgage point to reduce the rate to 6.25%. Or you could pay two points to reduce the rate to 6%.

Mortgage Points vs. Origination Points 

Origination points are fees charged by lenders to originate (establish) a new mortgage loan, expressed as a percentage of the loan amount. For example, if a lender charges a 1% origination fee on a $300,000 loan, the resulting $3,000 could be stated as one origination point. 

While mortgage points reduce your interest rate, origination points do not. Furthermore, because mortgage points are typically considered to be prepaid interest by the IRS, they are usually tax-deductible (for those who itemize deductions). Origination points, however, are service fees and are not tax-deductible.

Mortgage Points vs. Lender Credits

Lender credits perform the opposite function of mortgage points. While mortgage points allow homebuyers to pay more upfront to reduce the mortgage interest rate, lender credits allow homebuyers to reduce their upfront costs in exchange for a higher interest rate. Lender credits may help make homeownership accessible for borrowers who can afford higher monthly payments but may not have enough cash on hand to cover upfront closing costs.

Pros and Cons of Mortgage Points

There are benefits to paying mortgage points:[3]

  • Securing a lower interest rate could potentially save you a substantial amount of money over the term of your loan.
  • A lower interest rate would mean lower monthly mortgage payments.
  • Lower payments can improve your debt-to-income ratio, potentially making it easier to qualify for a loan.
  • It may be tax-deductible for those who itemize deductions (discuss this possibility with your accountant or tax preparer).

There are also potential downsides to paying mortgage points:[3]

  • Paying points could reduce the cash available for your down payment or renovation plans.
  • Paying points may also reduce the cash reserves needed to qualify.
  • It could take years to break even.
  • If you sell or refinance the house before the breakeven point, you could actually lose money by paying points.

Are Mortgage Points Worth It?

Mortgage points may be worth the upfront expense for some buyers. It depends on several factors, including:

  • Your down payment amount. If, for example, you have around 19% of the purchase price saved for a down payment, and you are deciding between paying a mortgage point or putting more money down on the house, you may be better off increasing your down payment. This is because a 20% down payment could prevent you from having to pay for private mortgage insurance (PMI).[4]
  • Your willingness to tie up funds in mortgage points. Some homebuyers prefer to keep cash available for unexpected expenses, despite the potential savings of mortgage points over the long term.
  • How long you plan to own the home. If you plan to sell in the next few years, you might not make enough payments to get the full benefit of your mortgage points.
  • Whether you plan to refinance in the next few years. Refinancing your mortgage would result in a new interest rate based on going rates at the time of the refinance.[5] If you refinance before reaching the breakeven point, you may not benefit from mortgage points.

Breakeven Point

In its simplest terms, the breakeven point is the time it takes to recoup your investment. If you were to own the house under your existing loan terms for longer than the breakeven point, you would come out ahead. If you were to sell or refinance before the breakeven point, buying points would not have been worth the expense.

To calculate your breakeven point on mortgage points, divide the upfront cost of your points by the monthly savings resulting from buying down your rate.

For example, if you paid $6,400 for two mortgage points on a $320,000 loan, reducing the interest rate from 6.5% to 6% on a fixed-rate mortgage, you might save around $104 per month (paying around $2,523 with a 6.5% rate and $2,419 with a 6% rate). To calculate your breakeven point, you would divide $6,400 by $104, which gives you 61.5. This means it would take 61.5 months to realize enough savings to offset your initial mortgage points expense. So you would need to own the home under the same loan terms for over five years and two months to see any benefit from paying those mortgage points.

Having said that, with a 30-year home loan, saving $104 every month, you could potentially save $37,440 in total interest expense if you don’t sell or refinance during those 30 years.

Mortgage Points on Adjustable-Rate Mortgages (ARMs)

With an ARM, your interest rate is locked during the introductory period, after which it is subject to adjustments at predetermined intervals to account for changes in market conditions. Mortgage points can be applied to the introductory rate, but may not affect adjustments after the introductory period. This may limit the potential benefits of purchasing mortgage points on an ARM.

Using the figures from the breakeven example above, if you paid $6,400 for two mortgage points on a $320,000 loan to reduce the rate from 6.5% to 6% on an ARM with a five-year introductory period, you may still save around $104 per month. However, the rate is subject to change at the five-year mark, limiting your savings to $6,240 ($104 times 60 months), and leaving you $160 short of breaking even. In this case, you may want to choose an ARM with a seven or 10-year introductory period to give yourself time to break even on the mortgage points.

Mortgage Point FAQs

Here are the answers to a few frequently asked questions about mortgage points.

Should I Pay Mortgage Points or Increase My Down Payment?

It depends. Increasing your down payment might save you more money than paying mortgage points in some cases. For example, if you can increase your down payment to 20% of the purchase price, you could avoid paying for private mortgage insurance. Increasing your down payment might also improve your debt-to-income ratio to the point that your lender is able to offer you a lower interest rate anyway.

Ask your lender to run the numbers so you can see your projected mortgage payment in each scenario and compare the two to determine the better option for you.

Can You Pay Mortgage Points After Closing?

No. The terms of your loan are determined before closing. Changing the terms of the loan after closing would require a refinance.

Does the Seller Ever Pay Mortgage Points?

The seller can pay mortgage points on behalf of the buyer. In a buyer’s market, where the available homes outnumber active buyers, sellers might offer to buy mortgage points to incentivize buyers to choose their listing over others.

Are Mortgage Discount Points Tax-Deductible?

Mortgage points are typically tax-deductible because they are usually viewed by the IRS as prepaid mortgage interest (and mortgage interest is tax-deductible). Those who itemize deductions, as opposed to taking the standard deduction, may usually deduct the full amount in the year of the home purchase, as long as IRS requirements, such as paying points in cash and having them itemized on your closing statement, are met. Importantly, if you don’t have enough deductions to benefit from itemizing rather than accepting the standard deduction, there will be no tax advantage from buying mortgage discount points. It is advisable to consult a tax professional for personalized guidance.

The Bottom Line on Mortgage Points

Mortgage points offer home buyers a path to a lower interest rate on their home loans. This could potentially save buyers money by lowering their interest expense and lowering their monthly mortgage payment. The trade-off for the lower interest rate is the upfront expense of buying mortgage points.

Determining whether mortgage points are worth it depends on how long you plan to own the home without refinancing. It also depends on your personal preferences, being willing to tie up funds now to see savings in the mid-to-distant future.

Still have questions on mortgage points? Need help deciding if buying mortgage points is the right decision for you. Connect with a PNC Mortgage Loan Officer (MLO) today by calling 1-855-744-2268. Our trained and licensed mortgage professionals are standing by to help answer your questions and walk you through every step of the home-buying process.