What are points on a mortgage, and how do they work?

Mortgage points are one way homeowners could reduce their interest rate and save money over the life of their loan*. 

While there are two types of mortgage points, the one that most borrowers refer to are discount points. Unlike the other mortgage points, discount points are optional when closing on your loan and will reduce the rate you have for the life of your loan. 

To learn more about mortgage points or to find out if they are right for you, talk to your lender when starting your home loan application. 

There are two types of mortgage points you could encounter when closing on your home loan. While they are both mortgage points, they are different in what they do, with one being optional. 

Mortgage discount points offer homebuyers a chance to lower their interest rate when they purchase discount points. Think of discount points like prepaying for interest on your loan. 

When purchasing discount points, homebuyers will pay 1% of their total loan amount and get a portion of their mortgage interest reduced for their loan. While discount points may seem expensive, they could end up saving you money over the life of your loan. The exact reduction can vary based on lender. 

Discount points are what is commonly referred to when talking about mortgage points. 

Unlike discount points, origination points do not lower interest rates but are used to help cover the cost of closing on your loan. 

Origination points are a part of your closing costs and are paid to your lender to cover the underwriting process and funding of your mortgage. 

Mortgage points cost 1% of your total loan value if you are looking to reduce your interest rate.  

Since mortgage points are a percentage of your loan amount, the exact cost of mortgage points will vary depending on how much you borrow and how many points you buy. Depending on your lender, you may be able to purchase up to four mortgage points. 

Mortgage points will reduce your monthly mortgage payments by lowering your interest payments. 

Since mortgage points are purchased upfront, they won’t add to your monthly payments, though they will add to the cost of closing on your home. With mortgage points, your interest rates will drop and so will your monthly mortgage payments. 

Buying mortgage points could be worth it depending on how long you plan to keep your loan. To find out if mortgage points are worth it to you, calculate your mortgage point break-even point. 

Mortgage points could be tax-deductible in the year that you purchase them if you itemize your deductions. This might help make points more affordable for many buyers. Make sure you talk with a tax expert to see if you qualify for any deductions**. 

One major factor in determining whether mortgage points are worth it depends on how long you plan to keep your loan. Depending on how many points you purchase, it can take you a few years to break even on the cost of your mortgage points. 

To calculate your break-even point when purchasing mortgage points, you will need to know your total loan amount and the interest rate you are getting. 

Because mortgage points cost 1% of your mortgage, multiply your total loan amount by 0.01 to determine how much your mortgage points would cost. To find out how much you will save each month, multiply your monthly payments by the interest rate you would get before any points. Then multiply your monthly payments by the interest rate you would get with your mortgage points.  

By subtracting the two, you will see how much mortgage points will save you each month. While that number might not seem like a lot of savings, remember that you are saving that amount 12 times a year for however many years your mortgage is. 

With the amount your mortgage points will cost and how much they will save you each month, divide your savings from your point cost. This will give you an idea of how many months it will take for your mortgage points to break even. 

The longer you plan to have a loan after purchasing mortgage points, the more you will end up saving with them. 

When looking to get mortgage points, it is smart to consider all the benefits and drawbacks borrowers have seen when purchasing mortgage points. 

• Lower interest rates
• Smaller monthly payments
• Savings over the life of your loan
• Tax-deductible

• Higher upfront cost
• Typically takes five to 10 years to break even
• Selling or refinancing your home before break-even point could result in money lost

Since mortgage points are paid during the closing of your loan, you may wonder if it would make more sense to put your money toward increasing the size of your down payment instead. 

If you are looking for whether buying mortgage points or making a larger down payment will save you money over time, it will depend on the terms of your mortgage. 

If you are hoping to save money over time, buying mortgage points might be the better option as after the first few years, you will pass your break-even point and start saving money each month.  

However, if you aren’t making a down payment of 20%, it might be better to increase your down payment amount and avoid any potential insurance that might come with your loan.  

Your loan-to-value (LTV) ratio shows you the percentage of your home is still covered by your mortgage. 

Using your funds to make a larger down payment will lower the amount you need to borrow from a lender as well as lower your LTV ratio. Buying mortgage points will change your interest rate but not your LTV ratio. 

A larger down payment will also increase your home equity, which you could access if you need access to funds later on. 

If you are looking to purchase mortgage points from your lender, you should start by talking to your lender and calculating what mortgage points will look like for you. 

The percentage off your mortgage interest can vary based on your lender. Understanding how much you lower your rate can help you better understand whether mortgage interest points are best for you. Some lenders make it easy to figure out if mortgage points are right for you by offering you an online mortgage point calculator. With one of these online calculators, you can see how much mortgage points will cost you and what savings look like for you. 

If mortgage points are right for you, talk to your lender about them when completing your home loan application. 

_{*Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Rate for current rates. Restrictions apply.} 

_{**Rate does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.} 

_{Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.} 

_{All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error-free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate. Rate its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.}