Are Mortgage Points Worth It?

What Are Mortgage Points?

Mortgage points, also called discount points, are a form of prepaid interest on a mortgage loan. For each point you buy, the lender will reduce your loan's interest rate.

You'll typically pay for mortgage points along with your closing costs, but some lenders may allow you to roll the cost into your loan, spreading out the expense over the loan's repayment term.

It's important to note that mortgage discount points aren't the same as origination points, which lenders charge to offset some of the costs associated with underwriting and originating the loan.

Learn more >> How Do Mortgage Points Work?

How to Calculate Mortgage Points

Each mortgage point typically costs 1% of your loan amount and reduces your interest rate by 0.25%. So, for a $350,000 loan with a 6% interest rate, you'd pay $3,500 to cut the rate to 5.75%.

That might not seem like much, but even a slightly smaller interest rate can create significant savings over time. To make it worth it, though, you'll need to hold on to the loan for long enough to at least break even on your upfront cost.

Here's a quick example of what the loan might look like with a few different scenarios:

To evaluate your situation, you can use Experian's mortgage calculator to get an idea of what your monthly payment would look like for each scenario. Then, divide the upfront cost by the monthly savings to determine how long it'll take you to break even.

Pros and Cons of Buying Mortgage Points

Mortgage discount points can provide a lot of savings in the long run, but it's important not to ignore the upfront costs. Here are some potential benefits and drawbacks to consider as you evaluate your options.

Pros

• Lower monthly payment: Even a single mortgage point can lower your monthly payment in a meaningful way, which can help if you're on a tight budget or need to meet a lender's debt-to-income requirement.
• Potential interest savings: If you hold on to your mortgage loan for a long time, you could save thousands of dollars in interest charges.
• The cost is tax deductible: Because discount points are a form of prepaid mortgage interest, you're allowed to deduct them on your tax return—for the year in which you paid them—if you itemize your deductions.

Cons

• High cost: Even a single point can cost you several thousand dollars, and that's on top of other closing costs and your down payment. While you may be able to roll the cost of discount points into the loan, that means you'll be paying interest on that amount, impacting your savings potential.
• Savings aren't guaranteed: It can take several years to recoup your upfront costs, and if you sell your home or refinance your loan before you reach the break-even point, those savings are gone.
• Could limit you in other ways: While mortgage points can provide some budget relief, the upfront cost could deplete your savings and leave you vulnerable to emergencies, such as costly repairs and maintenance. You may also consider whether that money is best used for other financial goals.

When Are Mortgage Points Worth It?

To determine whether it's a good idea to buy mortgage points, it's important to understand the cost, the impact on your monthly payments and your break-even point.

That said, here are some general situations where it could make sense to buy them:

• You plan on living in the home beyond the break-even point.
• You likely won't benefit from refinancing your mortgage before the break-even point.
• Your payment without points exceeds the lender's maximum debt-to-income ratio requirement.
• Buying points won't negatively impact your other financial goals.
• The upfront cost won't leave you vulnerable to potential unexpected expenses.
• You're buying a home, and you've negotiated for the seller to pay for discount points.

On the flip side, it may not make sense to buy mortgage points in the following scenarios:

• You need the cash for other expenses, such as moving, remodeling or monthly bills.
• You expect to refinance your loan to get better terms before the break-even point.
• You're not planning on living in the home long enough to reach the break-even point.
• You can qualify for a lower interest rate by increasing your down payment rather than buying down the rate with points.

Learn more >> Ways to Get a Lower Mortgage Interest Rate

How to Buy Mortgage Points

You can buy mortgage points by making an arrangement with your lender before the loan closes. The fee for the points will be paid directly to the lender as part of your closing costs.

When you receive the loan estimate document for your mortgage, you'll see the mortgage points separated as a line-item cost on the top left of page two. If you're buying a home in a buyer's market, you may be able to negotiate for the seller to pay for the points as a seller concession.

If you've already closed on your mortgage loan, the only way to buy mortgage points is to refinance your loan and make an arrangement with the new lender.

Alternative Ways to Save on Your Mortgage

Buying mortgage points isn't the only way to lower your mortgage's interest rate or how much you pay in interest overall. Here are some additional options you'll want to look into:

• Shop around. It can pay to get offers from multiple mortgage lenders, as each lender may have its own method for determining the interest rate it will offer you, as well as closing costs. Additionally, your costs could depend on the type of mortgage you get and whether it has a fixed or adjustable rate. Shop around to see which ones you'll qualify for and which will be best.
• Put down more money. Putting more money down on your home purchase reduces how much you're borrowing, lowering your monthly payment. What's more, a higher down payment could also help you qualify for a lower interest rate—no mortgage points required—and potentially eliminate the need for mortgage insurance.
• Decrease the loan's term. If you can afford to take on a larger monthly payment, a shorter repayment term can lead to a lower interest rate.
• Find a less expensive home. Buying a cheaper house is another way to reduce your monthly payment and down payment amount.

Once you have a mortgage, you may be able to refinance to get a lower interest rate. Or, if your lender allows it, you could make bimonthly payments to decrease how much interest accrues overall.

Learn more >> Ways to Save on Your Mortgage

Improve Your Credit to Save Money

Your credit scores can greatly affect your ability to get a mortgage and the interest rate you'll receive on a new loan or when refinancing. You can check your FICO^® Score^☉ for free from Experian.

Be sure to check your credit scores and also review your credit reports several months before you plan to apply for a home loan. If your credit needs some work, use the information found in your credit reports to improve your credit and prepare for a mortgage.