Mortgage discount points: What are they and when are they a good idea? Points are quoted as a percentage of the cost of your mortgage. Each point you purchase lowers your interest rate by a set amount that varies by lender. Buying points makes financial sense when you stay in the home long enough, because over time you can save more in interest than you paid for the point.
How do mortgage discount points work? During your mortgage loan closing, your lender may offer you the opportunity to lower your interest rate by purchasing mortgage points. Each mortgage point costs 1% of the amount you borrow. If you borrow $100,000, one point costs $1,000. If you borrow $200,000, it will cost you $2,000. This fee is paid at closing, so the points add to the initial cost of buying a home. You can even buy just part of a point, like ½ point for $500 or ¾ point for $750 on a $100,000 loan. Each point—or part of a point—reduces the interest rate to a specific amount that varies by lender. For example, if your lender offers you a 0.25% interest rate reduction for each point you purchase on a loan with an initial interest rate of 4.25%, purchasing one point would reduce your interest rate to 4%. Points are listed on the Loan Estimate as well as on Page 2, Section A, of the Closing Statement. The items listed on those documents must be related to a reduction in your mortgage interest rate. Note that some lenders also refer to other fees and initial costs as points, but the points that appear on the loan estimate and closing statement should be discount points related to a discounted interest rate.
Should I buy mortgage discount points? The decision to purchase discount points largely depends on how long you intend to stay in the home. Discount points can cost thousands of dollars up front, adding to the cost of the mortgage. But as the interest rate goes down, the money saved on monthly payments can eventually offset the initial cost. Once the cost of the points you paid at closing is covered, any additional savings from a lower interest rate is additional money in your pocket. To find out if purchasing points is right for you, estimate how long it will take to cover the initial cost based on what you can save.