Definition
Discount points
Discount points are upfront fees a borrower pays the lender at closing in exchange for a lower interest rate. One point equals 1% of the loan amount. How much each point lowers the rate varies by lender and market, so the decision comes down to how long the borrower keeps the loan.
Buying points is prepaying interest. The borrower pays more at closing to pay less every month afterward. There is no fixed exchange rate; one lender might cut the rate by a quarter point per point, another by less.
Worked example. On a $400,000 loan, one point costs $4,000. Suppose it lowers the rate enough to save $70 a month in principal and interest. Divide $4,000 by $70 and the break-even point is about 57 months, just under five years. A borrower who sells or refinances before then loses money on the points; one who keeps the loan for 15 years comes out well ahead.
Points raise the APR relative to the note rate because they are a finance charge. They may also be tax-deductible as mortgage interest in some situations; borrowers should ask a tax professional. Sellers sometimes pay points as a concession, which can be an efficient use of a credit. Negative points, or lender credits, work the other way: a higher rate in exchange for money toward closing costs.
The mortgage points calculator works out the break-even month and the net savings over the term.
Calculators that use this term
FAQ · 2 questions
Questions about Discount points
How much does one mortgage point cost?
One point equals 1% of the loan amount, so a point on a $300,000 loan costs $3,000. How much it lowers the rate varies by lender.
When is buying points a bad idea?
When you expect to sell or refinance before reaching the break-even point, or when the cash would leave you short on reserves or the down payment.
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