Should I buy mortgage points? Learn about costs, savings, and the break-even point

What are mortgage points?

Mortgage points, also called discount points, are prepaid mortgage interest. That means you pay a fee at closing in exchange for a lower interest rate.

How much is 1 mortgage point worth?

When you apply for a mortgage, a lender may provide several rate-and-point combinations. Buying more points generally gets you a lower rate.

One mortgage point usually costs 1% of your loan amount. For example, 1 point on a $300,000 mortgage would cost $3,000.¹

Mortgage lenders typically reduce your interest rate by 0.25% for each point you buy.

Can you buy fractional mortgage points?

You can typically buy points in increments as low as 0.125 or one-eighth of a point. Policies and available increments may vary by lender.

Mortgage points change your APR

Annual percentage rate (APR) is a measure of how much a loan costs. It includes interest, the cost of mortgage points, mortgage broker fees, and other charges associated with getting the loan.

Buying points will affect the APR on a loan because it increases the up-front costs while also reducing how much interest you pay.

Mortgage points and adjustable-rate mortgages

An adjustable-rate mortgage (ARM) has an initial fixed mortgage rate that applies for a set period. Once it expires, the rate on your loan will adjust based on an index plus a lender-set margin.

Buying points on an ARM usually affects the introductory mortgage rate.

However, an ARM also usually includes rate caps that limit how much the rate can change at one time or over the life of the loan. Reducing your initial rate may reduce the maximum rate allowed for your mortgage when compared with buying no points.

How to calculate your break-even point

Your break-even point is how long it takes for the savings from your lower interest rate to recoup the prepaid cost of mortgage points.

You calculate the break-even point by dividing the cost of points by the amount you save per month on interest. The result is the number of months it takes for the savings to surpass the cost.

Break-even calculation example

Consider a hypothetical $350,000, 30-year fixed-rate mortgage:

• At the assumed zero-point rate of 6.69%, the monthly principal-and-interest payment would be about $2,256.15. Check out today's Rocket Mortgage rates.
• You buy 1 mortgage point for $3,500 to reduce your mortgage rate by 0.25% to 6.44%.
• At 6.44%, the monthly principal-and-interest payment would be about $2,198.45.
• The monthly difference would be $57.70.

The calculation is:

$3,500 ÷ $57.70 = 60.66 months

Your break-even point would be about 61 months, or 5 years and 1 month.

If you sell, refinance, or pay off the mortgage before then, the monthly savings wouldn’t have recovered the $3,500 point cost.²

Treat the result as a planning tool, not a guarantee. Your eventual savings depend on how long you keep the loan and whether you follow the assumed payment schedule.

How much can you save by buying mortgage points?

Your potential savings depend on the loan amount, point cost, rate reduction, loan term, and how long you keep the mortgage.

A lender’s rate-and-point pricing may not be linear, so buying twice as many points won’t necessarily buy twice the rate reduction.

Mortgage points example

The following hypothetical continues using a $350,000, 30-year fixed-rate mortgage at 6.69% interest. Each full point reduces the rate by 0.25%.

Monthly figures include principal and interest but not taxes, homeowners insurance, mortgage insurance, or other housing costs.

The net-savings column assumes every scheduled principal-and-interest payment is made for the full 30-year term and subtracts the point cost. It doesn’t account for taxes, insurance, other closing costs, tax effects, the time value of money, or an early sale, refinance, or payoff.

Pros and cons of buying points on a mortgage

Buying points shifts some of the mortgage cost from later to now. Consider both sides before deciding.

Benefits of buying mortgage points

• A lower interest rate: Buying points reduces your interest rate and saves you money.
• A lower monthly payment: A lower interest rate reduces your monthly payment for mortgage principal and interest.
• Potential long-term savings: Paying the mortgage beyond the break-even point will save you money.
• Predictability with a fixed-rate mortgage: Your principal-and-interest payment remains stable for the loan term when you choose a fixed-rate mortgage.

Drawbacks of buying mortgage points

• More cash needed up front: Points increase your closing costs.
• Break-even risk: Selling, refinancing, or paying off the loan before you reach the break-even point may cost you more than buying no points.
• Less available cash: Money used for points can’t be used for a larger down payment, other closing costs, or held in reserve.
• Less value on an ARM: Buying points is less valuable on many ARMs because the rate reduction usually applies only to the initial rate.
• More complicated comparisons: A lower rate can distract from APR, origination charges, and other mortgage fees to avoid.

Should you buy mortgage points?

Buy points when the math and your plans support the decision, not simply because a lender offers them. Compare the break-even period with how long you expect to keep the mortgage, then consider how paying points would affect the rest of your finances.

When buying points may make sense

• You expect to keep the mortgage beyond the break-even point.
• You can buy points and still have enough to cover closing costs, reserves, and expected home expenses.
• The lender offers a meaningful rate reduction for the price.
• A lower monthly principal-and-interest payment supports a specific budget goal.
• The points option compares favorably with other offers for the best mortgage rates available to you.

When buying points may not make sense

• Points may not make sense when you expect to move, pay off the mortgage, or refinance before reaching break-even.
• Points also may be a poor fit when the rate reduction is small, cash at closing is limited, or another use for the money better supports your goals.

Tax rules for mortgage points

In certain instances, the cost of mortgage points can be deducted in the year they’re paid. More often, the cost of points is deducted equally over the life of the loan, according to the number of scheduled payments.

To deduct qualifying points as mortgage interest, you generally need to itemize deductions on your income tax return and meet IRS requirements.

A fee isn’t deductible as a point merely because the lender calculates it as a percentage of the loan. Charges for services such as an appraisal, title work, or document preparation aren’t discount points for this purpose.

Learn more about which closing costs are tax-deductible.

Alternatives to mortgage points

Points aren’t the only way to reduce your mortgage payment or save money on interest.

Make a larger down payment

A larger down payment reduces the amount you need to borrow. It also gives you more immediate home equity, which can get you a lower interest rate and help you avoid mortgage insurance.

Make extra payments on the loan

Additional payments will reduce your loan balance more quickly and save you money on interest over time. They don’t reduce your interest rate or the monthly payment.

Consider refinancing in the future

Refinancing replaces your current mortgage with a new one. A refinance can get you different loan terms that can save you money, but it requires a new application, qualification, and closing costs.

Borrow less

Buying a less expensive home or making a larger down payment reduces the amount you borrow. A smaller balance will reduce your monthly payment, and you’ll pay less interest on the loan.

Base your target price on your complete budget rather than treating the maximum amount a lender may approve as a spending recommendation.

FAQ

Here are answers to common questions about buying mortgage points.

How many mortgage points should I buy?

There’s no universal limit on how many points you can buy. Your options will depend on the lender and loan type you choose. Ask your lender for its written rate-and-point options.

How much does it cost to buy down 2 points on a mortgage?

Two mortgage points typically cost 2% of the loan amount. For a hypothetical $350,000 mortgage, 2 points would cost $7,000. The lender’s actual pricing determines how much the rate changes.

Can you buy mortgage points after closing?

No. Discount points are part of the interest-rate and closing-cost package selected before the mortgage closes.

Are mortgage points negotiable?

You can ask a lender to lower the rate, reduce the points, waive another lender fee, or provide a different rate-and-point combination before you sign. The lender doesn’t have to agree. Compare the full offer after any change. A lender could reduce one charge while increasing another, so make sure the rate, APR, points, and total closing costs still work for you.

The bottom line: Mortgage points may save you interest if you stay long enough

Mortgage points can be worth buying when you can comfortably cover the up-front cost and expect to keep the mortgage beyond the break-even point. Before deciding, compare the point cost, monthly savings, APR, planned length of stay, available cash, tax treatment, and alternatives such as making a larger down payment.

When you’re ready to compare your choices, apply online with Rocket Mortgage to check out your options.

¹ Any figures, interest rates, loan examples, and market data referenced in this article are hypothetical or aggregated for educational purposes only. They are not intended to reflect current pricing, available terms, or personalized loan options for any consumer. This content does not constitute an advertisement of credit terms, a solicitation or offer to extend credit, or a rate quote under federal or state lending laws. Actual mortgage rates and terms are determined by individual financial qualifications, property characteristics, market conditions, and other factors, and are subject to change without notice.

If you are seeking current, real-time mortgage rate information please refer to the official live rate information and product details published at RocketMortgage.com/mortgage-rates, where current pricing and various loan terms are made available.

² Refinancing may increase finance charges over the life of the loan.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

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