How to Understand Mortgage Discount Points and Save on Interest

When searching for the best mortgage rates today, you may come across the term mortgage discount points. Understanding how these points work and how they can impact your overall mortgage cost is essential to making informed financial decisions during the homebuying process or when refinancing your loan.

What Are Mortgage Discount Points?

Mortgage discount points, often just called "points," are fees you can pay upfront to lower your mortgage interest rate. Each point typically costs 1% of the loan amount and generally reduces your interest rate by about 0.25%, although this can vary slightly by lender and current market conditions.

For example, on a $300,000 loan, paying one discount point would cost $3,000 upfront and might lower your interest rate from 6.00% to approximately 5.75%.

How Do Discount Points Affect Your Mortgage Payment?

Lowering your interest rate through discount points reduces your monthly mortgage payment because the loan accrues less interest over time. This is especially beneficial for long-term borrowers who plan to stay in their home for several years.

Here’s how to visualize the impact:

Without points: At a 6.00% interest rate on a 30 year mortgage, your monthly principal and interest payment on a $300,000 loan would be about $1,799.
With one point (5.75% rate): The payment decreases to roughly $1,749, saving $50 per month.

Over time, these savings add up and can outweigh the upfront cost of buying the points.

When Does Buying Discount Points Make Sense?

Buying discount points is most advantageous if you:

Plan to keep your mortgage for a long time—generally more than 5 to 7 years.
Have extra cash available at closing beyond your down payment and closing costs.
Want to lower your monthly mortgage payments for better budget management.

If you expect to refinance or sell your home within a few years, paying for points upfront may not provide enough savings to justify the cost.

How to Calculate the Break-Even Point

The break-even point is the time it takes for your monthly savings to equal the cost of buying points. You can use a mortgage calculator to estimate this:

Break-even months = Cost of points ÷ Monthly payment savings
Using the earlier example: $3,000 ÷ $50 = 60 months or 5 years

If you plan to stay in your home longer than 5 years, purchasing points could be worthwhile. If not, you might save more by taking a slightly higher interest rate without points.

Discount Points and Refinancing

Discount points aren’t just for new mortgages—they can also be used when refinancing your home loan. If current mortgage rates today are lower than your existing rate, paying points may help you lock in a better rate and reduce your monthly payment.

However, since refinancing usually involves closing costs and other fees, carefully calculate the total costs versus your anticipated savings. Using a mortgage refinance rates calculator can help you understand if paying points during refinancing is beneficial.

Other Considerations When Buying Discount Points

Tax Implications: Mortgage discount points may be tax deductible in the year they are paid if the loan is for your primary residence and other IRS rules are met. Always check current tax guidance or consult a tax professional.
Negotiations: Some lenders might allow negotiating the price of discount points or offer promotions where points are included for free or at a reduced cost.
Loan Type: Discount points availability and impact can vary by loan type, like conventional mortgages, FHA loans, or VA loans.

Using a Mortgage Calculator to Assess Discount Points

Many online mortgage calculators now let you input discount points to see how they influence your interest rate, monthly payment, and overall loan cost. When researching rates through platforms like Rocket Mortgage or comparing quotes from lenders such as Freedom Mortgage or Guild Mortgage, always ask how discount points factor into the rate offered.

Running these numbers before deciding helps avoid surprises at closing and ensures you choose the best mortgage deal for your situation.

Summary

Mortgage discount points are a valuable tool to lower your mortgage interest rate and monthly payments, but they require upfront cash and careful calculation. Understanding how points work, calculating the break-even period, and using mortgage calculators can help you determine if buying points is the right choice for your home loan or refinance.

Careful comparison of current mortgage rates, loan terms, and discount points with trusted mortgage sources will empower you to make informed decisions and potentially save thousands over the life of your mortgage.