Points

Points, also called discount points, are an upfront fee a borrower can choose to pay a lender at the closing of a mortgage, in exchange for a reduced interest rate on the loan. One point is equal to one percent of the loan's principal amount; on a mortgage of $200,000, one point would cost $2,000, and would typically reduce the interest rate by a fraction of a percentage point, with the exact amount set by the lender.

Paying points is essentially a trade: more money upfront, in exchange for a lower rate and therefore lower payments across the life of the loan. Whether this trade is worthwhile depends heavily on how long the borrower plans to keep the loan, since the upfront cost only pays for itself if the interest savings over time exceed what was spent on the points.

Buying points works like prepaying part of a loan's future interest cost in exchange for a permanently lower rate, similar to paying an upfront fee for a cheaper ongoing subscription rate instead of a higher pay-as-you-go price. The upfront cost only makes financial sense if the borrower sticks around long enough to actually benefit from the lower rate across many months or years of payments.

Borrowers who expect to sell or refinance the home within just a few years are often advised against paying points, since they may move on before the reduced rate has had enough time to offset what was paid for it.

A borrower can estimate whether points are worthwhile by comparing the upfront cost against the monthly savings the lower rate provides, dividing the cost of the points by the monthly savings to find roughly how many months it would take to break even. Staying in the loan beyond that break-even point generally means the points were worth paying; leaving sooner generally means they were not.

Points should not be confused with an origination fee, which covers the lender's cost of processing the loan rather than buying down the interest rate, though both are commonly paid at closing and both add to the total upfront cost of taking out a mortgage.

Because paying points shifts cost from ongoing interest into an upfront fee, comparing mortgage offers that include different point structures can be confusing unless a borrower looks beyond the headline interest rate. Many lenders present several options side by side, such as zero points at a higher rate, one point at a moderate rate, and two points at the lowest rate, letting the borrower choose based on how long they expect to keep the loan and how much upfront cash they are willing to commit at closing.

Some loan estimate disclosures required by regulators specifically break out points separately from other closing costs, making it easier for borrowers to see exactly how much they are paying to buy down the rate compared with other upfront expenses.

Whether paying points makes financial sense can also depend on the broader direction of interest rates at the time of borrowing. A borrower who expects to refinance soon if rates fall significantly may be less inclined to pay points upfront for a marginally lower rate, since refinancing would reset the clock on recovering that upfront cost through a brand new loan. Conversely, in a higher, relatively stable rate environment, borrowers planning to keep a loan for many years may find paying points more clearly worthwhile.

Because this decision depends heavily on individual circumstances and expectations about the future, many mortgage lenders and financial advisers recommend running the specific break-even calculation for a borrower's own likely timeline rather than relying on general rules of thumb about whether points are worth paying.

Points paid on a mortgage used to buy a primary home are, in some countries, eligible for a specific tax deduction in the year they are paid, subject to detailed conditions, which is a factor some borrowers weigh alongside the pure interest-savings calculation when deciding whether to pay points.